The quality of ESG disclosures by benchmark administrators is poor, says the UK’s financial regulator.
A preliminary review by The Financial Conduct Authority (FCA) said that while good disclosure is fundamental to all regulated benchmarks, it had “particular concerns” about those for ESG (environmental, social and governance). It warned that the “subjective nature” of ESG factors, and how data and ratings are incorporated into benchmark methodologies, “gives rise to an increased risk of poor disclosures”. This could adversely impact users and investors, and ultimately hinder the transition to a net-zero economy.
The watchdog’s review found that benchmark methodologies did not consider enough detail on ESG factors and had failed to ensure that data and ratings products are accessible, clearly presented and explained to users. It also discovered that benchmarks had failed to fully implement ESG disclosure requirements. Other failures included administrators using outdated data and ratings or failing to apply ESG exclusion criteria.
In a letter to benchmark administrators, Our supervision strategy for benchmark administrators, the FCA warned them that they needed to have strategies in place to tackle the issues highlighted by the review. It will also expect firms to explain these strategies on request.
“Firms are responsible for ensuring that they understand and comply with the regulatory requirements that apply to them,” it said. “Where we see firms fail to consider our feedback, we will deploy our formal supervisory tools and, where appropriate, consider enforcement action.”
