UK sets out ‘non-prescriptive’ code of conduct for ESG ratings and data

A parallel initiative to develop a formal regulatory regime is separately being undertaken by the Treasury.

ESG data and ratings firms could begin disclosing details of their compensation arrangements with clients, according to a draft version of the UK’s code of conduct for providers published today.

The move by the UK has been widely anticipated following a period of intense regulatory activity that has seen similar initiatives tabled in EU, India, Japan and Singapore. It is one of two distinct UK government initiatives on the subject, the other being a regulatory regime currently in development by the Treasury which would apply solely to ESG ratings.

The Treasury has already acknowledged the potential for “some similarities” between the code of conduct and any ensuing regulation in a scoping exercise that closed last week.

Compliance with the code of conduct is strictly voluntary, and providers have the added flexibility of deciding how best “to meet the expectations… in a manner aligned to their own business model and structure”. It additionally does not “prescribe a singular approach as to how the Principles should be embedded within a provider’s organisation”.

Unlike other jurisdictions, the UK’s code is intended to have a broad application across a range of ratings and data products such as second-party opinions and controversy alerts, which commonly monitor news stories for negative headlines. It will again be up to providers to assess whether the code is relevant to them.

To demonstrate compliance, providers could consider disclosing “the general nature of the compensation arrangement or any other business or financial relationships that exist” with clients, as a way to address conflicts of interest (COI) that may arise.

Providers may also take steps to ensure that staff are not compensated or evaluated “on the basis of the amount of revenue” generated by products, and structure reporting lines and pay packets to manage COI.

The provisions are similar to those initially proposed by global regulatory forum IOSCO last year and later by Japanese regulators, although the latter focused on data firms that have adopted the issuer-pays model prevalent in the credit ratings sector.

Barring some exceptions, the predominant business model in Europe is subscriber-pays according to the bloc’s financial regulatory body ESMA, where payment is made by banks, investors and other financial institutions rather than the assessed entity.

The code encourages providers to use publicly disclosed sources where possible and explain how estimations are derived when actual data is not available, ensure they have sufficient internal resources, and establish “a clear and consistent” point of contact for assessed firms to point out errors or make other queries.

Providers are also asked to describe their methodologies and assessment criteria, and to ensure their consistent application.

Providers that opt-in to the code will be expected to provide annual reports explaining their approach to implementation.

The code was developed by a cross-sectoral industry working group convened by the International Capital Market Association (ICMA) and the International Regulatory Strategy Group (IRSG), a public-private body co-sponsored by financial industry body TheCityUK and the City of London Corporation.

The group’s four leads are from Moody’s, investment manager M&G, law firm Slaughter and May and the London Stock Exchange Group. Regulators from Singapore, Japan and Ontario are listed as international observers.

Stakeholders can provide feedback to the working group via email ( by 5 October.