ESG Data and Ratings Working Group
The ESG Data and Ratings Working Group (DRWG) has issued a code of conduct aimed at regulating the behavior of ESG ratings agencies and data providers and reducing the risk of greenwashing.
DRWG was initiated by the Financial Conduct Authority (FCA) and is supported by the International Capital Market Association (ICMA) and the International Regulatory Strategy Group (IRSG). The members of the DRWG include rating agencies, academic institutions, asset management companies, etc.
Background of ESG Code of Conduct
ESG is playing an essential role in the financial market, and the demand for related products (ratings and data) is also growing rapidly. Market participants are also concerned about their transparency, quality, and reliability while acquiring and using these products. In 2021, the International Organization of Securities Commission (IOSCO) issued a report stating that regulatory agencies need to include ESG ratings and data products within their regulatory scope.
Various jurisdictions have begun to develop relevant regulations. The European Union has designated the European Securities and Markets Authority (ESMA) as the regulatory authority for European ESG rating and data providers. The Monetary Authority of Singapore (MAS) also released consulting documents, planning to supervise ESG rating and data services in stages. Considering the actions of these jurisdictions, DRWG believes that establishing an international industry standard can ensure the operability and consistency of global regulatory policies.
Related Post: EU Proposes Regulation on ESG Rating Services
Overview of ESG Code of Conduct
DRWG believes that establishing codes of conduct for ESG data and ratings can help with providers’ information disclosure, improve governance of the market, and enhance information transparency. The new industry guidelines are guided by the reports released by IOSCO and revolve around the four areas that IOSCO focuses on:
- Governance: Data providers need appropriate governance measurements.
- Systems and controls: Data providers need to adopt corresponding business procedures to ensure the release of high-quality ESG ratings and data products.
- Conflict of Interest: Data providers need to identify, avoid, and manage potential conflicts of interest to maintain independent and objective services.
- Transparency: Data providers need to fully disclose the basic issues of related services.
Contents of ESG Code of Conduct
The code of conduct developed by DRWG is divided into six parts, namely:
- Principle on good governance: Data providers should clarify their organizational structure, define the roles and responsibilities of employees, and require them to comply with codes of conduct.
- Principle on securing quality: Data providers should provide high-quality products, consider their own nature, scale, and complexity in their business, and regularly review and modify ESG analysis methods.
- Principle on conflict of interest: Data providers should identify, disclose, eliminate, and manage potential conflicts of interest, and ensure that these conflicts do not affect the integrity and accuracy of services.
- Principle on transparency: Data providers should disclose relevant issues related to ESG ratings and data products, and disclose analytical methods in their works, and enable stakeholders to have a reasonable understanding of this information.
- Principle on confidentiality: Data providers should establish data confidentiality management measures and protect non-public information to ensure the reliability and credibility of their business.
- Principle on engagement: The data provider should have effective interaction with the serviced entity, provide business information to the entity, and promote efficient communication.
DRWG requires that when data providers sign the code of conduct, they need to adjust their business to the corresponding requirements. ESG rating providers have a six-month adjustment period, while ESG data providers have a twelve-month adjustment period. DRWG also welcomes opinions from stakeholders in the following months on ESG data and ratings.