Major providers support world’s first ESG data code of conduct

FTSE Russell, MSCI, Sustainalytics, Moody’s ESG and ISS ESG have spoken in favour of Japan’s proposed code of conduct for ESG data providers, which will be the first regulatory initiative to establish minimum standards across the market.

The draft code, issued by the Financial Services Agency of Japan (FSA), includes measures to increase transparency from providers such as giving companies the chance to examine ESG data for errors prior to publication and disclosure of methodologies and data sources.

A public consultation of the draft ended in September.

Satoshi Ikeda, chief sustainable finance officer at the FSA, said the regulator is “confident” that it can finalise the code for providers by the end of this year.

The code notably addresses staffing practices across the broader ESG data and services market, reflecting long-standing concerns over the quality and depth of internal resources at providers. The draft version specifies that data providers should “secure necessary professional human resources” and “develop capacity-building of human resource”.

The code has been issued following calls from the International Organization of Securities Commissions (IOSCO) last year for tighter policing of data providers amid mounting concern over transparency and conflicts of interest.

The FSA has made some significant revisions to the code from an earlier draft that had been proposed by an advisory panel. The initial version would have required data providers to turn over both their data sources and the corresponding ESG products to companies for checks prior to publication.

It also encouraged providers to rely on “public information as much as possible and other sources… as necessary” to ensure product quality. Those requirements have been removed.

ESG data providers have broadly welcomed the draft code, which will be enforced on an “opt-in” voluntary basis.

A spokesperson from FTSE Russell said: “We support the FSA’s code of conduct approach and welcome their continued efforts in supporting enhanced ESG standards in its markets, in line with IOSCO principles.”

MSCI also welcomed the proposed code stating that it “will consider the final provisions of the code of conduct published by the FSA and, where appropriate, take steps to incorporate the underlying principles”.

Moody’s ESG has engaged with the FSA and intends to comply with the code once it’s finalised, assuming the draft version doesn’t change significantly.

Sustainalytics, which is owned by Morningstar, said the new code will “inspire greater investor confidence in ESG ratings, while fostering innovation”. At the same time, the firm warned against “concrete implementation challenges as it relates to data and second-party opinions”.

Arthur Carabia, director of policy research at Sustainalytics, added that the code needs to be better tailored.

“We believe it should focus on ESG ratings, where the most material assessments and methodologies come into play,” he said. “Should the scope of the code remain unchanged, we suggest additional adjustments to better align it as it pertains to ESG data and second party opinions.”

Sustainalytics said companies should be allowed to check data for factual errors but not challenge data sources, arguing that this could “threaten” the independence of ESG research.

In a statement to the FSA, ISS ESG commended the code on its principles-based approach.

“Critically, the code does not prescribe specific methodological approaches or criteria for conducting ESG evaluations or providing data, nor template-based disclosure – which, given investors’ changing preferences and therefore providers’ changing product lines, runs the risk of being over-standardised with limited to little user utility or of becoming stagnant altogether.”

The firm added that it was in favour of a dedicated contact point and greater transparency but equally, “strongly supports the code making clear that interactions between a provider and a rated entity should be ‘constructive’ and subject to the provider’s discretion and policies and procedures”.

ISS ESG also supported language in the appendix to the code, which states that companies “should be careful not to give the impression to ESG evaluation and data providers that they are exerting undue influence”.

All five providers who spoke to Responsible Investor confirmed that they had responded to the FSA consultation but did not say whether they will adopt the final code. S&P Global did not provide comment when contacted.

A European Securities and Markets Authorities consultation on the regulation of the ESG data industry in June received a mixed response from stakeholders on whether to regulate ESG ratings specifically or all ESG products.

The UK’s Financial Conduct Authority has also announced a code of conduct for ESG data providers, which is being developed by a newly appointed secretariat, comprising the International Capital Market Association and the International Regulatory Strategy Group.