top of page

The UK's FCA joins the EU's securities watchdog in warning against "greenwashing" and its harms

FCA and Reuters


Over 2020 a number of high-profile scandals over the true nature of companies held in sustainable funds drew attention to the nature of Environmental, Social and Governance (ESG) ratings and how much investors could rely on them. Positioning the UK and London as a centre of green and sustainable finance will require regulation that clients trust, according to the FCA, the UK's Financial Conduct Authority. It said that if the market is to grow and develop, and is to maintain integrity, consumers have to be able to trust the products they’re offered, and rely on them to perform as they expect. We need to ensure that our regulatory framework can help to achieve this. Global coordination of regulation can take time, the harms may arise locally in the meantime.

ESG ratings, widely used by asset managers to make climate-friendly investments, need tighter oversight to avoid risks to the smooth functioning of financial markets, Britain’s Financial Conduct Authority stated on 22 June 2021.

Investors are increasingly demanding that asset managers put their cash into companies that meet "green" or ESG criteria, with references to ESG ratings embedded into their investment processes, the FCA said.

But the ESG ratings business, a market that could be worth $1 billion this year, has no firm definition of data provision that applies globally, the FCA said.

ESG ratings providers, which rank companies' performance based on ESG factors, have different methodology and use different ways to plug gaps in data, leading to little correlation between them, the FCA said.

Combined with other features of ESG rating provision, there may be "potential for harm to market functioning, or to consumers, in some circumstances", the FCA said in a consultation paper on Tuesday.

"Since ESG rating providers operate and cover companies globally, we consider that there would be a strong benefit in a globally applicable regulatory approach, rather than a local regime," the FCA said. "However, global coordination can often take time and the harms may arise locally in the meantime."

There has been a flurry of consolidation among companies that provide ESG ratings. MSCI has acquired Innovest and KLD, Moody's has bought Vigeo Eiris, Morningstar taken over Sustainalytics, S&P Global completed an acquisition of RobecoSAM in January 2020 and the London Stock Exchange Group completed its acquisition of Refinitiv this year.

Policy options include guidance for firms on using ESG data and ratings, a best practice code for ESG data and rating providers, and introducing regulation of ESG data and raters, which has already been suggested by regulators in the European Union, the FCA said.

Read further at

bottom of page