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In brief

On 22 November 2022, the FCA announced the formation of a new ESG data and ratings group, which will work to develop a Code of Conduct for Environmental Social and Governance (ESG) data and ratings providers.

The proposed Code originates in the FCA’s Feedback Statement (FS22/4), published following its consultation on climate-related disclosures by standard listed companies (CP21/18). This consultation highlighted that there is an active debate in the market around the role and regulatory oversight of ESG providers. In its Feedback Statement, the FCA noted that the conclusions reached by ESG ratings and rating-like products providers should not be a source of harm, as long as the providers: 

  • Are transparent about their methodology, information, and data inputs.
  • Determine their outputs by applying systematic processes, and sound systems and controls.
  • Identify, manage, and disclose conflicts of interest.
  • Operate with robust governance standards. 

The regulator’s concern, however, is that some of these conditions may not be fully met in practice, thereby causing potential damage to the wider market. These risks are exacerbated by the fact that firms are beginning to embed ESG data and ratings products into their investment processes with ever-increasing frequency, which in turn influences capital allocation decisions.

Stop-gap measure?

Although the UK Government is considering whether to bring ESG data and ratings providers within scope of the FCA’s supervisory perimeter, adoption of the legislative measures necessary to achieve this will take some time. For that reason, the FCA appears to be approaching the Code as an interim, voluntary measure prior to implementation of any new legislative regime.

What will the Code of Conduct look like?

There is as yet limited information on what the Code will look like. The FCA has, however, described it as “a comprehensive, proportionate and ambitious set of best practices”, and noted that it will be structured around four key outcomes:

  1. Transparency
  2. Good governance
  3. Robust systems and controls
  4. Sound management of conflicts of interest

As noted, the Code will be voluntary only at the outset, and it remains to be seen what the take-up will be amongst ESG data providers.

Asset class focus

The Code appears intended to cover a range of asset classes, and it is notable that both LSEG and ICMA will be involved in taking the initiative forward. This will come as good news for many in the market, given concerns around patchy ESG data in the fixed-income markets.

International and EU angle

The aim is for the Code to promote global consistency. The FCA has therefore stressed that it will take into account not only international recommendations from IOSCO on ESG rating and data providers but also developments in individual jurisdictions such as Japan and the EU. Earlier this year, for instance, we saw ESMA published the outcome of its Call for Evidence on Market Characteristics of ESG Rating and Data Providers, which is intended to feed into a broader EU push to regulate ESG data providers. The FCA will likely be watching the EU’s developing framework closely.

Commercial considerations and next steps

The FCA’s proposed Code is likely to be welcomed by the increasing number of firms that rely on external ESG data providers. The emphasis on transparency around the methodology for setting ESG ratings is helpful, given concerns in the market that individual ESG providers can reach varying conclusions depending on data inputs and differing degrees of emphasis on ESG criteria. ESMA has previously stressed, for example, that the majority of ESG ratings users typically contract with several providers simultaneously, in order to receive different types of ESG assessments. It can be challenging for firms to navigate between the differing approaches of ratings firms in practice.

Once the Code is published, regulated firms should review which of their providers are signatories to it, or agree to comply with it on a public or contractual basis.

From the perspective of ESG data providers themselves, the Code may form a “soft” introduction to operating in a more regulated, transparent environment prior to the introduction of UK legislation. It also represents an opportunity for providers to enter into a dialogue with the FCA around the challenges of putting together ESG ratings in circumstances where underlying data is poor quality or challenging to obtain.


Caitlin McErlane is a partner in Baker McKenzie’s Financial Services & Regulatory Group in the London office. Caitlin's practice focuses on advising a range of global financial institutions on complex and high value regulatory matters. She advises banks, major corporates, payment institutions and asset managers on navigating UK and EU financial services regulation. She has particular experience in advising clients on regulatory implementation projects, day-to-day compliance issues, and regulatory issues arising in the context of large-scale transactions. She also expertise in the areas of banking and wholesale financial markets regulation, in particular in the FX and fixed income space, alongside experience advising market infrastructure providers, including major international exchanges, trading platforms, clearing systems and payment services providers, on a variety of compliance issues. Caitlin is also a member of the Baker's ESG and sustainability taskforce, and advises a range of clients on the drafting and implementation of ESG policies and the implications of becoming a signatory to the UNPRI and the Stewardship Code. Caitlin is an authority on regulatory reforms in the sustainability space and sits on a number of trade association working groups. She has recently been interviewed by Climate Action on her work and is a frequent speaker on the subject.


Shaneil Shah is an associate in the Financial Services & Regulatory Group in the London office. Shaneil has experience advising fintechs, funds, banks, asset managers and payment institutions on compliance with their regulatory obligations. He also advises on contentious matters, including investigations and enforcement proceedings brought by financial regulators, internal regulatory investigations and financial services disputes. Shaneil recently spent time on secondment to the London branch of a global investment bank and to Baker McKenzie in Hong Kong.

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