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Mar 20, 2023

FCA warns fines may be issued over poor ESG standards

Four ESG benchmarks need immediate attention, says UK regulator

The Financial Conduct Authority (FCA) has sent a letter to ESG benchmarking administrators expressing concern over the ‘poor’ quality of current ESG measures that have emerged from its preliminary review.

In a letter published today and addressed to CEOs, the FCA warns that where companies fail to consider its ESG benchmarking-related feedback, it will deploy its ‘formal supervisory tools’ and consider ‘enforcement action’.

In its letter, the FCA highlights four issues ESG benchmarking compilers should be mindful of:

  • The superficiality of ESG factors considered in benchmark methodologies
  • Failure to ensure accessibility and clear delivery to users of ESG data and rating products
  • Partial implementation of ESG disclosure requirements
  • Failure to correctly implement their own ESG benchmarks methodologies.

The regulator has called for all benchmark administrators to urgently implement strategies to address these core issues and says it will carry out more work in these areas to address ‘potential failings’.

It also says it is working with the government, which is to ‘shortly’ consult to extend the FCA’s rules to ESG ratings agencies, which do not currently fall under the FCA’s regulations.

Time is up 

The financial regulator reiterates in its letter that it already outlined risks and priorities in a previous statement sent to benchmark administrators in September 2022. In that same statement, the FCA had also observed that the subjective nature of ESG factors and how data and ratings are incorporated into benchmark methodologies could increase the risk of disclosures. More than six months later, it looks like the FCA’s worst fear of companies failing to meet its expectations has materialized.

What’s at risk is the timely transition to a net-zero economy says the regulator, which warns: ‘We will holistically consider the risks of harm related to ESG benchmarks across the value chain. Where firms fail to consider our feedback, we will deploy our formal supervisory tools and, where appropriate, consider enforcement action in line with the FCA’s approach to enforcement.’