On 20 March 2023, the FCA published a Dear CEO letter to benchmark administrators outlining the issues identified during its preliminary review on ESG benchmarks.

This follows a previous Dear CEO letter, sent in September 2022, which highlighted the risk of poor disclosures for ESG benchmarks. The FCA flagged the importance of high quality ESG benchmarks to support trust in the market for ESG products and the transition to a net zero economy.

The FCA’s preliminary review, which assessed the quality of ESG-related disclosures made by a sample of UK benchmark administrators, found that the overall quality of those disclosures was poor. The issues identified included:

  • Insufficient detail and description provided of the ESG factors considered in benchmark methodologies.
  • Failing to ensure that the underlying methodologies for ESG data and ratings products used in benchmarks are accessible, clearly presented and explained to users.
  • Not fully implementing the ESG disclosure requirements introduced by the UK Low Carbon Benchmarks Regulation.
  • Benchmark administrators failing to implement their ESG benchmarks’ methodologies correctly, including using outdated data and ratings or failing to apply ESG exclusion criteria.

The FCA expects all benchmark administrators to have strategies in place to address the issues identified in the letter and to be able to explain those strategies on request. It plans to carry out more work in this area, including holistically considering the risks of harm related to ESG benchmarks across the value chain. Where firms fail to consider the feedback set out in the letter, the FCA will use the full range of its supervisory tools.

The concerns highlighted in the letter are likely to be of interest not only to benchmark administrators but also to those in the sector that rely on ESG benchmark disclosures, such as asset managers.

Finally, the FCA has confirmed that it supports the regulation of ESG ratings and is currently working closely on this with the government, which is expected to consult shortly on whether and how to extend the FCA’s regulatory perimeter to include ESG ratings providers.