Japanese FSA warns of ‘tick-box’ approach to ESG ratings code of conduct

Japan's financial regulator says it wants more from some providers as 10 firms sign up to UK voluntary code.

The director of strategy development at Japan’s Financial Services Agency (FSA) has warned that some ESG ratings providers are taking a “tick-box” approach to demonstrating alignment with the country’s voluntary code of conduct.

Hideki Takada was speaking at the launch event for an ICMA-hosted UK code of conduct for ESG ratings and data providers held at the London Stock Exchange on Wednesday.

As part of the Japanese code, which is voluntary, providers disclose statements of how they have aligned with the principles of the code of conduct, or explanations of why they have not aligned with certain parts.

Takada said the FSA’s initial analysis of the disclosures highlight differences in both quality and quantity. “Some providers are doing a really good job, explaining very much in detail, referring each principle to their own business model and how they have put each principle into practice,” he said.

However, “some providers are not doing that good”, he added. Poor disclosures included simply saying “we are doing this” and repeating the language of the principles, he explained.

What the FSA would like to see is providers understanding what the principles mean to their own operations, showing how they comply or, if they have good reasons, explaining how they take a different approach.

On a positive note, Takada said that the FSA had spoken to stakeholders who noted changes in the practices of some providers, including improved transparency.

Other panellists at the launch event also discussed the box ticking approach. Sacha Sadan, director of ESG at the UK’s Financial Conduct Authority, said he hoped compliance statements would be useful for investors looking to appoint a provider.

“It is a competitive market out there and if you get a response that’s just box ticking […] I would hope that [ratings users] are going to use that as a due diligence process.”

“As a regulator, we will be asking the people who are using these products how are they doing due diligence, and that will evolve as they get more knowledge and data and transparency”.

David Henry Doyle, head of government affairs and public policy for EMEA at S&P Global, said he felt that what had been lost in the conversation was the fact that ESG ratings are commercial products and users will still need to scrutinise what they are buying.

“The code of conduct does not absolve a user of these products from doing its own due diligence, challenging the provider, asking whether it’s signed up to this code or any other code and saying ‘I don’t think you’ve done it quite as I expected you to’.”

Provider interest

Ten providers had signed up to the UK code by the time of the launch event. The full list included Bloomberg, Clarity AI, ICE, Moody’s, MSCI ESG Research, the London Stock Exchange Group, RepRisk, Sweden’s SustainAX, UK provider Vested Impact, and S&P Global Sustainable 1.

Notable for their absence, however, were ISS ESG and Sustainalytics, both of which have signed up to the Japanese code.

A spokesperson for ISS ESG said it was considering signing on to the UK code. A spokesperson for Sustainalytics said it welcomed the new code and was currently evaluating it.

The ICMA code is modelled on IOSCO’s high-level recommendations on the topic from 2021, and sets out six principles, including on good governance, transparency and conflicts of interest.

It is designed to ensure international operability and providers that opt in must also provide annual reports on their approach to implementation.