The Labour Government will bring forward plans to regulate the ESG rating agencies. Chancellor Rachel Reeves said a new bill will be put before Parliament next year, with the aim of increasing transparency in this largely unregulated but influential sector.
It is expected that this will mirror similar legislation that has already been introduced across the EU.
ESG rating agencies wield considerable influence in the financial sector, with many asset managers and pension firms using these independent ratings as part of their stock selection process. These third parties provide ESG ratings for almost all listed companies. There have, however, been concerns that there is little information how these scores or ratings are derived, or the weight given to particular ‘environmental’ or ‘social’ elements of an overall ESG score, and the fact that different agencies can, on occasions, give quite divergent ratings to the same company.
Reeves made the announcement on a trip to Canada to meet leading figures within its pension industry. She said: “We are forging a new partnership with industry to get finance to the best, most innovative and most sustainable companies so that we can unleash Britain’s potential.”
As part of this trip Reeves met with Canadian Mark Carney, former governor of the Bank of England to discuss clean technology investment.
The Treasury, under the previous chancellor Jeremy Hunt had already started work on this area. Reeves confirmed that the FCA will set the rules for this new regime, which should help further develop the UK’s sustainable finance sector.
The announcement has been broadly welcomed by the pensions industry, although there were some concerns about how far this regulation will go.
Hymans Robertson head of responsible investment Simon Jones says: “External ESG ratings are a simple and effective tool for communicating assessments on companies and investment portfolios, but there are issues in how they have been perceived.
“Whilst ESG ratings typically reflect the internal management of ESG risks, they are often conflated with providing an assessment of the external impact that a company may have. Coupled with the fact that there are often discrepancies in ratings produced by different agencies, this can create a lack of trust.
“Although there are products that make direct use of ESG ratings as a basis for capital allocation, we believe its is the underlying data which is used as an input to the ratings process that is more valuable.
“Product providers are increasingly creating their own bespoke methodologies which draw on multiple insights and data sources to develop investment products, rather than simply relying on the output from a single agency. Regulation of ESG ratings providers will be helpful if it promotes transparency and consistency or approaches.
“However, we would not want to see this regulation extended to those using ESG data solely for the purposes of creating investment products.”
