PensionBee has welcomed the Financial Conduct Authority’s (FCA) move to introduce regulation for Environmental, Social and Governance (ESG) ratings providers.
In its response to the FCA’s consultation, it urged the regulator to go further to boost transparency, tackle conflicts of interest and reduce the burden on smaller companies.
PensionBee expressed broad support for the FCA’s proposals, describing the introduction of a proportionate and internationally aligned regulatory regime as long overdue. The company highlighted the critical role ESG ratings play in shaping how businesses are assessed by investors and the wider market, underlining the importance of ensuring ratings are transparent, accurate and free from conflicts of interest.
However, PensionBee also identified four key shortcomings in the current ESG ratings landscape that must be addressed through regulation.
These include:
- Limited transparency around rating methodologies;
- Structural conflicts of interest where providers offer consulting services to the same entities they rate;
- The disproportionate operational burden placed on smaller companies through complex and resource-intensive data requests; and
- The absence of any meaningful channel through which rated entities can engage with, or seek recourse against, ESG rating providers.
As part of its submission, PensionBee set out a series of targeted recommendations to strengthen the proposed framework.
These include:
- Requiring transparent disclosure of factual corrections and their impact on ratings, including clear accountability when errors are amended;
- Making proactive disclosure of conflicts of interest a baseline obligation, including visibility of commercial relationships between providers and rated entities;
- Strengthening proportionality in ESG data collection, including greater standardisation and use of pre-populated data to reduce reporting burdens; and
- Broadening the definition of complaints to include reputational harm, alongside establishing a clear FCA escalation route for non-compliance.
Clare Reilly, Chief Investment Solutions Officer at PensionBee, said: “ESG ratings play an increasingly influential role in how companies are understood and assessed, yet the current market lacks the transparency and consistency that both investors and rated entities need. We welcome the FCA’s proposals as an important step towards building a more robust and credible framework, but it is essential that the final rules go further if they are to address the issues that persist today.
“In particular, greater visibility and improvements to rating methodologies are needed to enhance quality and reliability. Clearer disclosure of commercial relationships between raters and companies are critical to managing conflicts of interest to support the independence of ratings. Without this, there remains a risk that ratings could be shaped by factors that are not visible to the market, undermining confidence in their integrity.
“It is also vital that the regime recognises the realities faced by smaller listed companies. ESG data requests are often designed with large corporations in mind, placing a disproportionate burden on businesses with fewer resources. A more proportionate and standardised approach would not only reduce this burden, but also improve the consistency of ESG data.”
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