In September 2022, we sent a portfolio letter to benchmark administrators where we highlighted the risk of poor disclosures for ESG benchmarks. High-quality ESG benchmarks are important to support trust in the market for ESG products and the transition to a net zero economy.

We have now completed a preliminary review of ESG benchmarks. This found that the overall quality of ESG-related disclosures made by benchmark administrators was poor. We have sent a further letter to administrators outlining the issues identified, including:

Not enough detail on the ESG factors considered in benchmark methodologies.
Not ensuring that the underlying methodologies for ESG data and rating products used in benchmarks are accessible, clearly presented, and explained to users.
They are not fully implementing ESG disclosure requirements.
Benchmark administrators fail to implement their ESG benchmarks’ methodologies correctly – for example, using outdated data and ratings or failing to apply ESG exclusion criteria.
We expect all benchmark administrators to have strategies to address the issues identified in this letter. 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.

We have previously said that we support the regulation of ESG ratings. 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 rating providers. We also support and encourage the development of a voluntary Code of Conduct for ESG data and rating providers.