The importance of a code of conduct for environmental, social, and governance ( ESG ) ratings and data service providers has been magnified in recent years with the explosion in ESG ratings and data, the advent of technology, particularly that of artificial intelligence ( AI ), and the continuing lack of standardization in these sectors.
At the very least, a code of conduct for ESG ratings providers and data service providers ensures clarity on how ratings are derived, and how to avoid conflict of interest, reflect changes in ESG factors and market dynamics, provide standardized feedback and ensure data accuracy.
While the precise number of ESG ratings and data services providers in Asia is not specified, the sector is expanding rapidly. In Japan, for example, there are about 17 ESG ratings providers that have adopted the voluntary code of conduct implemented by the Financial Services Agency ( FSA ) as of October 2024, including MSCI, S&P, Sustainalytics, ISS ESG and Bloomberg.
Both Japan and Singapore have implemented their respective codes of conduct for ESG ratings and data service providers earlier, the FSA in December 2022 and the Monetary Authority of Singapore ( MAS ) in December 2023. In both cases, the development of these codes was led primarily by the regulators with participation from industry players.
In Hong Kong, while the Securities and Futures Commission ( SFC ) also played a key role developing the city’s own code of conduct, the SFC took a more collegial approach by sponsoring a working group composed of industry bodies and other stakeholders.
Unlike in Singapore, for example, where the MAS is responsible for publishing and overseeing their code, in Hong Kong it is the International Capital Market Association ( ICMA ), the industry body for the debt capital markets, which is responsible for hosting and maintaining this code.
In all jurisdictions – Japan, Hong Kong and Singapore – the codes were based on principles and recommendations issued by the International Organization of Securities Commissions ( IOSCO ), an association of organizations that regulate the world’s securities and futures markets.
The importance of the collegial approach and adhering to the IOSCO recommendations was highlighted by Winnie Tam, the SFC’s senior manager for intermediaries supervision, speaking during in a panel discussion held by the SFC and ICMA on November 29 2024, on the occasion of the launch of the code of conduct: “The SFC definitely wanted to promote the IOSCO recommendations in Hong Kong but ESG ratings and data products are not within the regulatory limits of the SFC. It’s the same for other local financial regulators ( FSA and MAS ).”
The IOSCO’s key recommendations for the code of conduct are integrity of ratings and data products, transparency, management of conflicts of interest, governance, regulatory and supervisory framework, accessibility and comparability, and training and expertise.
A focus group was formed in 2022, Tam notes, consisting of representatives of ESG ratings and data product providers and local licensed asset managers that would be the key users of the ESG products.
“The exercise that we did is to understand how these providers are actually operating in the local market,” Tam explains, “and also how the local asset managers are actually engaging with these providers.”
Key observations from the focus group include:
“Taking these observations into consideration, the SFC wanted to ensure that the first initial steps would be balanced, flexible and proportionate,” Tam notes, “and that they are actually nurturing the industry, because we know that it is still a growing industry and do not want to create any entry barriers to any of these small to niche players.”
The ICMA agreed to be the secretariat for drafting the code of conduct, which was launched on November 29 2024.
Officially, the Hong Kong Code of Conduct for ESG Ratings and Data Products Providers aims is to establish and promote a globally consistent, interoperable and proportionate voluntary code for providers offering ESG ratings and data products and services in Hong Kong.
The code is voluntary and operates on a “comply or explain” basis, meaning providers must either adhere to the code or explain why they do not.
“We will observe how ESG providers will be adopting the code,” Tam points out, “and together with ICMA, we will revisit the code as well in a few years’ time and assess if there’s a need for our side to take any additional steps if they are needed in the future.”