Environmental, Social and governance (ESG) benchmarks are often overly vague and could prompt greenwashing, the Financial Conduct Authority (FCA) determined on Monday.
ESG benchmarks, which offer scores to companies based on ethical credentials, lack detail, are not clearly determined, often don’t meet requirements and sometimes fail to use their own methodologies, the FCA found in a preliminary review.
Warning it may issue fines, the FCA said the quality of benchmarks was “poor,” posing “potential harm to markets” and could even prompt greenwashing.
“For the financial sector to help support the transition to a more sustainable future, market participants and financial services firms need high-quality information, a well-functioning ecosystem, and clear standards,” it said.
ESG reporting has become increasingly common among firms, with ratings also now being “embedded” into investment cases, though the FCA does not yet directly regulate administrators.
The FCA added it was working closely with the government to bring ESG rating agencies under its regulation, though firms should build on the feedback or risk “enforcement action."
Bloomberg, S&P Global, Moody's and FTSE Russell all have ESG rating wings, and are among the worlds largest administrators.
ESG focussed funds are set to hit a combined US$50trn by 2025, equalling roughly one third of traded assets, according to Bloomberg analysts.
An unstandardised approach to determining ESG scores has been scrutinised though, with the US Securities and Exchange Commission saying it would watch the market more closely this year.
Though ESG ratings, often ranging from zero to 100, may look good on paper, varying categories to determine scores mean they should be taken with a pinch of salt, Conservice consultant Jason Krychiw warns.
Citing similar issues in the UK, the FCA confirmed the government would soon consult on its powers over ESG rating agencies, which are already subject to a code of conduct.