Huw Jones

LONDON (Reuters), Britain needs to regulate sustainability ratings of companies, a regulatory body suggested Monday. This would improve transparency and reduce greenwashing risk, as well as protect investors.

Regulations are worried about the flood of money into ESG (environmental, social, and governance) funds. These funds have been inflated to attract investors’ cash.

International Regulatory Strategy Group (IRSG), in a report stated that rating was increasing rapidly and investors required confidence that the market is operating with high integrity.

According to the IRSG, ESG Ratings are only one way portfolio managers can interpret many ESG data sources. But the rising importance of ESG products in both fixed-income and equity markets cannot be underestimated.

Asset managers use the ESG ratings for companies to help them pick stocks.

TheCityUK sponsored the IRSG. The City of London Corporation called for principles-based, proportionate rules that are compatible with international efforts to standardize data, and to protect investors.

The IRSG stated, “The IRSG believes regulation of ESG Ratings is desirable now to give more transparency regarding the basis for ESG Ratings and reduce potential conduct risk.”

The Financial Conduct Authority of Britain consulted last year about whether ESG raters should have either voluntary guidance or binding regulation.

European Union’s Securities Watchdog, ESMA is currently studying the sector in preparation for potential EU regulation. Global securities body IOSCO also created its first global framework last Nov. to open up the “black box”, ESG rating ratings.

According to the IRSG, a comprehensive approach is needed in order to prevent fragmentation of rules that could lead increase compliance costs.

Accenture’s report, “Increased effort is required to improve quality, consistency and availability of the underlying information to ensure market trust in ESG products,” stated the consultants.