As published on cityam.com, Monday 21 February, 2022.
A regulatory research body has called on Britain to clampdown on corporate ‘greenwashing’ by regulating sustainability ratings, as investors increasingly seek out sustainable investment opportunities.
Surging investment into environmental, social and governance (ESG) funds has raised concerns among regulators that firms are exaggerating sustainability credentials to attract investor cash.
The International Regulatory Strategy Group (IRSG), sponsored by the City of London Corporation and TheCityUK, has now called for the use of ratings to standardise practices around ESG ratings and reassure investors that claims around sustainability are genuine.
“While ESG ratings provide just one interpretation of the many sources of ESG data available to portfolio managers, the growing significance of ESG ratings products across both equity and fixed-income markets cannot be understated,” the IRSG said.
A set of principle-based and proportionate set of rules would bring consistency to how firms provide data on ESG, the IRSG said, as well as protecting investors.
“The IRSG believes that regulation of ESG ratings is now desirable, to provide more transparency around the basis for ESG ratings and mitigate against potential conduct risk,” it said.
The calls from the IRSG come after the Financial Conduct Authority opened plans for a consultation last year on whether firms should offer voluntary “best practice” on ESG or if there should be stricter regulation, with the watchdog is set to deliver the outcome this year.