Major ESG data providers adopt Japanese code of conduct

The industry has welcomed the code issued by Japan’s Financial Services Agency, with several major providers publicly endorsing it.

FTSE Russell, ISS ESG, Moody’s, MSCI, S&P and Sustainalytics have all publicly endorsed Japan’s principles-based code of conduct for ESG data providers, the first regulatory initiative to establish minimum standards across the market.

The code, issued by the Financial Services Agency (FSA) of Japan, was finalised in December and open for endorsement for six months, closing last week.

The final draft followed a public consultation, which ended last September and showed the market broadly supported the draft.

Satoshi Ikeda, chief sustainable officer at the FSA, said the code has opened a dialogue between data providers and regulators, even if it is only initially being implemented on a voluntary basis.

“We need to test the recommendations in practice and not rush into mandatory regulation,” he said. “It will take a few more years before any concrete regulation is released on ESG ratings, I think.”

The six main principles of the Japanese code include securing quality, developing human resources, ensuring independence and managing conflicts of interest, ensuring transparency, confidentiality, and communication with companies.

In its statement of endorsement, Sustainalytics said the code provides a “meaningful framework for ESG data providers to demonstrate their respective measures designed to support transparency, quality, resources, management of conflicts of interest, confidentiality and engagement with research targets”.

It added that it welcomed the efforts, led by IOSCO and regulators in other jurisdictions, to “promote the transparency and quality of ESG ratings”.

ISS ESG commended the regulator for its “leadership in prioritising the principles of research independence and robust and transparent internal governance practices of ESG research providers”.

FTSE Russell and Refinitiv noted that the code is a positive step for improving the “reliability, comparability and interpretability” of ESG ratings and data products.

It also praised the regulator for creating a “sufficiently flexible” framework in a rapidly developing market.

Moody’s, MSCI and S&P all publicly endorsed the code and disclosed how they are implementing its various principles within their respective organisations.

The FSA will publish a final list of endorsements by the end of the month and consider next steps in a three-year-term, including the possibility of revising the code.

The regulator will also publish the status of endorsement regarding ESG data provision by June 2024.

Japan has spearheaded efforts to regulate the space through its voluntary “opt-in” code, with the UK and Singapore also in the process of consulting on their respective codes of conduct.

The UK today published its draft code which is out for consultation until 5 October and due to be finalised by the end of the year.

Other regulators in the EU and India also published ESG ratings and data rules for their respective markets, following a global call to action to do so by global regulatory forum the International Organisation of Securities Commissions (IOSCO).