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UK to Regulate ESG Ratings

UK to Regulate ESG Ratings

by Starling Insights

Starling Insights Editorial Board

Nov 20, 2023


As reported in the Financial Times, the UK government has set a plan in motion to regulate agencies evaluating companies' environmental, social, and governance (ESG) performance, addressing concerns about the largely unregulated sector's influence on trillions of pounds in sustainable investments. 

The proposal, expected in January next year, follows a three-month consultation that closed in June. Currently, there is minimal oversight on how organizations create ESG criteria and rate other companies against them. "We're not waiting for a crisis [to act]," said Sacha Sadan, head of environmental, social, and governance issues at the UK's Financial Conduct Authority (FCA).

The move aligns with a broader international crackdown, as the European Commission proposed new rules for ESG rating providers in June. The FCA has encouraged the industry to adopt a voluntary code of conduct, addressing concerns about its formal oversight powers. The voluntary code will be published next month and emphasizes transparency and conflict of interest avoidance. While pressure on the sustainability data market has increased since 2021, there are calls for flexible regulations that balance consistency, transparency, and innovation to meet emerging market needs. 

In Starling's 2023 Compendium, Alex Edmans, a Professor of Finance at London Business School and author of Grow the Pie: How Great Companies Deliver Both Purpose and Profit, argues that, while ESG factors are essential for long-term business value, current approaches to measuring and rating ESG performance between companies are misguided.

"ESG is nothing special since it’s no better or worse than other intangible assets that create long-term financial and social returns, such as management quality, corporate culture, and innovative capability," Edmans writes. "Currently, companies get more brownie points for improving their ESG performance than these other intangibles; investor engagement on ESG factors is put on a pedestal compared to engagement on other value drivers. But we want great companies, not just companies that are great at ESG." ▸ Read More 

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