FCA outlines where improvements are needed in ESG benchmarks

Following the conclusion of a preliminary review of practices of ESG benchmark administrators and the publication of a Portfolio Letter in September 2022 addressing first findings and key deficiencies (please see EventID 17228 for more information), the FCA has now published a follow-up Portfolio Letter in this context.
As already noted in its first letter, the FCA states that it has identified MAJOR deficiencies in „ESG-related disclosures made by benchmark providers“ which include, but are not limited to the following:
– Benchmark providers (which is interchangeable used with „administrators“) often failed to provide sufficient details on the ESG factors they consider in their benchmark methodologies;
– Similar deficiencies could be noted as regards the disclosure of the methodologies themselves used to derive a benchmark and of underlying data used in this context.
– Some ESG-benchmark administrators even failed to apply their own methodologies correctly, e.g. by using old and outdated data and ratings.
Due to these deficiencies, the FCA once again outlines the key requirements in these areas which primarily include:
1. All benchmark providers must issue a benchmark statement for each benchmark or families of benchmarks which is easily accessible. The disclosures in these statements have to be clear, precise, and understandable to permit users to make informed decisions. The statements must also include a description of the methodology of each benchmark and how ESG factors are taken into account.
2. Benchmark administrators must disclose the ratings used for derivation of a particular benchmark AND the methodology behind such ratings. This particularly holds true for ratings that are provided by third parties.
3. Benchmark providers must establish processes to verify the quality of the input data (i.e. via validation rules) and to create similar procedures as regards the implementation of each specific methodology used to come up with the benchmark.
4. And: Benchmark administrators must develop policies to monitor the correct application of their own methodology. This includes standards to detect any errors in the computation process.
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As these are only the key deficiencies and requirements outlined in the new Portfolio Letter, please refer to the original document for more detailed, comprehensive information.