FCA finds failings across the board for ESG benchmarks

Letter to administrators calls out 'poor' methodologies and implementation

ESG benchmarks have the “potential for widespread failings”, the Financial Conduct Authority (FCA) has said in a letter to administrator CEOs.

Since its letter to benchmark administrators last year, the UK regulator has been conducting a preliminary review on ESG benchmarks, assessing the quality of disclosures offered by a sample of them.

It has found these generally to be poor, adding: “There were often instances where benchmark administrators did not provide sufficient detail and description of the ESG factors considered in their benchmark methodologies.”

The regulator said there was little explanation on the ESG factors used in benchmarks and the thresholds benchmark administrators choose to apply when measuring these, adding it was “concerned that this can contribute towards or lead to greenwashing”.

This is particularly concerning where benchmarks that purport to pursue ESG objectives apply ESG factors in such a way that the constituents are not materially different to a similar non-ESG benchmark, it said.

Similarly, the regulator said some descriptions of the market or economic reality measured by benchmarks were “generic”, particularly in benchmark statements for families that covered a broad range of benchmarks.

Regardless of what descriptions were included, the FCA then found examples of where administrators had not in fact implemented their ESG benchmark methodology correctly.

In addition, “some firms had failed to fully implement the disclosure requirements introduced in the Low Carbon Benchmarks Regulation (UK version of Commission Delegated Regulation (EU) 2019/2089),” the FCA said.

“All benchmark administrators in our sample failed to provide sufficient explanations in their benchmark statements on how ESG factors are reflected against each of the requirements referred to in paragraph 2 of Article 27 of the UK BMR. For example, no benchmark administrator referred to ESG factors in their explanations of the rationale for adopting the benchmark methodology.”

The regulator’s letter this week also clarified that its new greenwashing rules would apply to benchmark administrators if brought into force.

“You should consider this in your benchmark naming, disclosures, and other supporting documentation, including marketing materials,” it said.

In July last year, the FCA published feedback to its consultation on integrating ESG in UK capital markets, in which it stated there is a “clear rationale” for the regulation of ESG ratings.


Natasha Turner

Natasha is global editor at ESG Clarity, part of Mark Allen Financial, and has been a financial journalist for seven years. She has been shortlisted for Story of the Year and Investment Journalist of the...