The Financial Conduct Authority (FCA) has warned major ESG benchmark administrators of regulatory action due to the “potential for widespread failings”  identified as part of a preliminary regulatory review.

A Dear CEO letter dated 20 March followed communications from September last year, regarding the FCA’s “particular concerns” of “subjective” ESG benchmarks’ methodologies and disclosures. These concerns then prompted the subsequent review.

FCA director of infrastructure and exchanges Jon Relleen shared a warning to senior management to ensure they have strategies in place to address the risks identified or face enforcement action due to their current “poor” quality.

The letter read: “This work assessed the quality of disclosures made by a sample of UK benchmark administrators. In general, this was poor.

“There were often instances where benchmark administrators did not provide sufficient detail and description of the ESG factors considered in their benchmark methodologies.”

Other key risk areas identified the letter were:

  • A lack of detail concerning the ESG factors considered within benchmark methodologies.
  • Limited transparency for users to understand the underlying methodologies for ESG data and ratings products used in benchmarks.
  • Incomplete implementation of ESG disclosure requirements in the Low Carbon Benchmarks Regulation.
  • Failure of some organisations to implement their own disclosure methodologies correctly. The FCA lists the example of some administrators not applying their own ESG exclusion criteria or using out-of-date ratings and data.

The letter also emphasised that the general ‘anti-greenwashing’ rule proposed under Sustainability Disclosure Requirements (SDR) will apply to benchmark providers, reminding chief executives that any sustainability-related claims they make must be clear, fair and not misleading.

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