The UK’s financial watchdog warned that it will fine benchmark administrators that create overly vague sustainability targets, after finding that most of these benchmarks are of poor quality and could lead to ‘greenwashing’.
The Financial Conduct Authority completed a review of environmental, sustainability and governance (ESG) benchmarks, which companies use to showcase progress towards sustainability goals.
It said the overall quality of benchmarks it reviewed was “very poor”. In particular, it said that the methodologies for too many benchmarks were overly vague.
“We are concerned that this can contribute towards or lead to greenwashing,” the watchdog said.
The FCA said that ESG ratings had been “increasingly embedded” in investment, and therefore transparency was important to prevent “potential harm to markets”.
While a code of conduct exists for ESG rating providers, the FCA said it would support the introduction of Government regulations for the sector.
“We are working closely with Government on this, who are expected to shortly consult on whether and how to extend the FCA’s perimeter to include ESG ratings providers,” the FCA said.
Until then, the watchdog said it would take action against ESG rating providers who do not address the failings it noticed in the review.
“We expect all benchmark administrators to have strategies to address the issues identified in this letter,” it said. “We will be doing more work in this area to address the potential failings, and expect firms to be able to explain these strategies on request.
“We will use the full range of our tools where this does not happen.”
Today’s letter to those who create ESG benchmarks is the latest action the FCA has taken to fight greenwashing. Last year, the body launched a consultation on specific greenwashing rules, requiring that “sustainability-related claims must be clear, fair and not misleading”.
