The code establishes industry standards of transparency in methodologies and data sources, governance, and conflicts of interest management.
The Monetary Authority of Singapore (MAS) has launched a public consultation on an industry code of conduct for providers of ESG ratings and data products.
The public consultation was announced on 28 June by Indranee Rajah, Second Minister for Finance at MAS, at an International Capital Market Association conference. The consultation set to run until 22 August.
The proposed code of conduct establishes minimum industry standards of transparency in methodologies and data sources, governance, and management of conflicts of interest.
MAS says the industry code was co-created with ESG rating and data product providers and modelled closely after International Organization of Securities Commissions’ recommendations of good practices as set out in its November 2022 “Call for Action” paper.
The consultation paper also highlights a November 2021 report by IOSCO, which highlighted a lack of transparency of methodologies and data sources, governance and controls, as well as management of conflicts of interest as key areas of concern regarding ESG rating and data products.
“The industry code of conduct aims to elevate the quality, reliability and transparency of ESG ratings and data products in Singapore,” Rajah said.
Under the new code, ESG rating and data product providers will have to disclose how forward-looking elements are factored into their products.
“This will enable financial market participants to better understand the use case of ESG products and provide more accurate market pricing signals relating to transition risks and opportunities,” Rajah added.
Phased and proportionate approach
MAS said the consultation is part of a “phased and proportionate” regulatory approach, which starts with a voluntary industry code of conduct that was co-created by the regulator in collaboration with industry players.
MAS plans to monitor the implementation of the industry code and observe global developments before taking further steps to formalise a regulatory framework for ESG rating providers.
Lim Tuang Lee Capital Markets Assistant Managing Director at MAS, said the code of conduct will help give greater confidence to financial market participants using ESG ratings and data products.
“The call for product providers to disclose how forward-looking elements such as an entity’s transition plans are considered in their products, is critical for more accurate market pricing signals related to climate risks and opportunities,” he said.
The European Union recently proposed a regulatory framework for ESG rating providers that aims to crack down on conflicts of interest and boost transparency of methodologies.
The proposal noted that the current ESG rating market “suffers from deficiencies and is not functioning properly” due to the opaqueness of methodologies used by providers and conflicts of interest leading to investors’ needs “not being met and confidence in ratings being undermined”.
To address this, the European Commission said that ESG ratings providers must use “rigorous, systematic, objective, and continuous” methodologies that are reviewed on an annual basis to ensure their “quality and reliability”.
Japan’s Financial Services Agency (FSA) has already finalised a code of conduct for ESG data providers operating in the country, while the Securities and Exchange Board of India (SEBI) has proposed a formal and “enforceable” regulatory and supervisory framework for ESG rating providers.
The UK’s Financial Conduct Authority (FCA) is also consulting on a regulatory regime for ESG ratings providers.
However, Pietro Bertazzi, Global Director of Policy Engagement and External Affairs at environmental non-profit CDP, told ESG Investor that the different rules, with slight deviations from each other, could risk creating market confusion or even fragmentation of the regulatory architecture of ESG ratings and data products “at the global scale”.