Consultation Paper on Proposed Code of Conduct for Environmental, Social and Governance (“ESG”) Rating and Data Product Providers

In view of the significance of ESG data and ESG ratings to foster the transition towards net zero carbon emissions and in view of the increasing interest of investors in the ESG performance of financial market firms, the Monetary Authority of Singapore, MAS, has launched a public consultation on a Code of Conduct (CoC) for ESG rating and data providers. The proposed code is a first step in seeking to implement a (regulatory) framework for such providers which – according to fund managers – very often lack disclosures about product methodologies, data sources, processes involved in the monitoring of ESG ratings, or governance and the handling of conflicts of interest.
Given the fact that ESG ratings and the entire industry is still in its early stages of development with ongoing product innovation, MAS proposes a phased and proportionate regulatory approach. Specifically, it plans to first implement the beforementioned Code of Conduct for ESG rating and data product providers which will be voluntary and non-regulatory in nature. In the meantime, MAS will monitor global regulatory developments and, when there is greater global regulatory convergence, conduct a more detailed public consultation to develop a local regulatory regime for ESG data and rating providers. This approach aims to instill confidence in ESG ratings and data products, encourage market development and innovation, and provides flexibly to respond to global regulatory developments.
#### The proposed CoC would contain the following SEVEN key principles as outlined in the corresponding draft:
(1) ESG rating and data product providers must establish and enforce documented policies and procedures to ensure the creation of high-quality ESG rating and data products. These products should primarily rely on publicly disclosed data sources, and alternative sources should only be used when necessary. The methodologies employed should be transparent and well-defined.
(2) ESG rating and data product providers must adopt and implement written policies and procedures to maintain independence in their decision-making processes. Providers should remain free from political or economic influence and effectively address potential conflicts of interest arising from their organizational structure, business activities, financial interests, and personnel.
(3) ESG rating and data product providers must identify, avoid, manage, mitigate, and disclose any potential conflicts of interest that could compromise their impartiality and objectivity of their operations.
(4´) ESG rating and data product providers should ensure sufficient transparency of their ESG ratings and data products. This includes disclosing the methodologies for coming up with ratings and processes used to develop the products, allowing users to understand their composition and production. However, proprietary or confidential information, data, and methodologies should remain protected and not be publicly disclosed.
(5) ESG rating and data product providers should establish written policies and procedures to handle and safeguard all non-public information received from or communicated by any entity related to its ESG rating and data products. Appropriate measures must be taken to protect the confidentiality of such information.
(6) ESG rating and data product providers should ensure efficient information gathering processes from covered entities, when relevant, in order to streamline data procurement for both parties.
(7) Whenever possible and appropriate, ESG rating and data product providers should address and respond to concerns raised by covered entities, while preserving objectivity of their products and services.
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MAS has also included a set of best practices that shall illustrate how rating or date product providers can comply with the above noted principles.