Singapore’s Monetary Authority has put forward plans for a code of conduct for Environmental, Social, and Governance (ESG) ratings and data providers with the objective of establishing greater transparency in methodologies and data sources, governance, and management of conflicts of interest. The implementation of the proposed code will initially be monitored by the MAS before working its way into a regulatory framework for ESG rating providers.  [1]

ESG ratings are a critical component in the investment process. They provide investors with metrics on company’s risk exposure and opportunities which ultimately provides for a more grounded investment decision-making process. A high rating will demonstrate a company’s good capability at handling risks. Typically, investors will prefer to invest in companies with a good rating as they offer attractive incentives. [2]

How ratings agencies establish their ratings, however, is a broader discussion. The lack of uniformity and standardization in ESG ratings systems, negatively impacts investors. As the integration of sustainability-related risks and opportunities into capital allocation decisions grows more popular, so the use of ESG ratings and data products becomes more important. Therefore, the proposals put forward by MAS to improve the lack of transparency of methodologies and data sources mark the initial phases of establishing standards on the quality and reliability of ESG ratings and data products in Singapore. [3] [4]

More recently, on June 13^th the European Commission also brought forward a new set of proposals designed to impose stricter regulations on ESG rating agencies to protect and strengthen sustainable investing. Within the proposal, changes to the way ESG rating agencies offer their services to investors and companies in the EU will allow for better-informed decision-making regarding sustainable investments. [5] Moreover, the proposal noted that the current overall ESG rating market suffers from deficiencies and is not functioning properly due to the opaqueness of methodologies used by providers and conflicts of interest leading to investors’ needs not being met and confidence in ratings being undermined.

Neighboring Japan and their Financial Services Agency (FSA) have successfully implemented a comprehensive code of conduct for ESG (Environmental, Social, and Governance) data providers. Additionally, the Securities and Exchange Board of India (SEBI) has taken significant strides by proposing a robust and enforceable regulatory framework to oversee ESG rating providers. [6]

In MAS’ engagement with investors from Financial Institutions (FI) similar challenges have also been shared many of which are the same challenges identified by a report published by the International Organisation of Securities Commissions (IOSCO) in November 2021. Among them include insufficient disclosures of product methodologies, data and processes, and the providers’ governance. [7]

The Response

In response to many of the criticisms associated with the “nascent stage of development” ESG ratings agencies providers find themselves in, MAS proposes a gradual regulatory approach for ESG rating and data product providers. Initially, a voluntary industry Code of Conduct (CoC) will be implemented. Proceeding this stage as global regulatory standards align; they will then proceed to conduct a thorough public consultation to establish a local regulatory regime. This approach will aim to instill confidence in ESG ratings and data products, foster innovation, and market growth, and remain adaptable to global regulatory changes.

Under the proposed Code of Conduct (CoC), MAS also seeks to encompass a broad definition of ESG (Environmental, Social, and Governance) ratings and data products, drawing inspiration from established codes in other jurisdictions, like Japan’s CoC for ESG Evaluation and Data Products. The CoC intends to cover products offering opinions on an entity’s ESG profile or utilizing provider estimations, calculations, or analysis.

To ensure proper governance and conflict-of-interest management, providers will be required to disclose methodologies and data sources used to derive the ESG ratings and data outputs they generate. However, the CoC will carve out specific products already regulated in Singapore, such as credit ratings under the Securities and Futures Act 2001 (SFA) and research analyses or reports on regulated investment products under the Financial Advisers Act 2001. [8]

Who Should Adopt the CoC?

MAS suggests that those who should adopt the CoC should be ESG ratings, and data product providers with direct connections to the securities and derivatives industry in Singapore. Considering the global distribution of ESG ratings and data products, the CoC would be applicable in two scenarios:

1. If the provider is Singapore-based and offers ESG ratings and/or data products related to activities and institutions in the securities and derivatives industry, either locally or internationally.
2. If the provider is based overseas but offers ESG ratings and/or data products pertaining to activities and institutions in the Singapore securities and derivatives industry.

To accommodate specific cases, MAS also plans to adjust for certain providers not intended to be covered by the CoC. For example, academic institutions solely providing specialized ESG data for academic purposes would be exempt from the CoC’s provisions. [9]

Additionally, to ensure effectiveness of the CoC in instilling market confidence, MAS has set out for the adoptees a series of strategies to maximize the adoption. The first consists of encourage compliance through a “Comply or Explain” approach, adhering to best practices only. Second, having providers complete and publish a Self-Attestation Checklist to exhibit commitment. Third, to ensure interoperability across jurisdictions, third-part assurance is voluntary but will add a layer of credibility to providers’ compliance efforts on ESG data reporting.

MAS’s CoC aims to enhance transparency for ESG Rating and Data Product Providers amidst a rapidly evolving regulatory landscape. Various jurisdictions, including the UK, US, EU, and India to name a few are proposing regulations to ensure accountability and supervision of ESG rating providers operating within their territories. These developments highlight the increasing importance of robust regulatory frameworks for the integrity and reliability of ESG data and ratings worldwide. Moreover, the proposed regulations will play a vital role in shaping a responsible and trustworthy ESG rating ecosystem as the industry continues to evolve globally and in Singapore.

Sources

1. https://www.asiaasset.com/post/27384-masesgdata-gte-0630
2. https://kpmg.com/dk/en/home/insights/2022/10/esg-rating.html
3. https://news.bloomberglaw.com/esg/lack-of-uniformity-in-esg-ratings-system-poses-risks-opportunities
4. https://esgnews.com/mas-proposes-code-of-conduct-for-providers-of-esg-ratings-and-esg-data-products/
5. https://ec.europa.eu/commission/presscorner/detail/en/ip_23_3192
6. https://www.esginvestor.net/singapore-proposes-industry-code-for-esg-data-providers/
7. https://www.responsible-investor.com/singapore-consults-on-esg-data-and-ratings-code-of-conduct/
8. https://www.mas.gov.sg/publications/consultations/2023/consultation-paper-on-proposed-code-of-conduct-for-esg-rating-and-data-product-providers
9. https://www.mas.gov.sg/-/media/mas/news-and-publications/consultation-papers/annex-i-draft-code-of-conduct-for-esg-rating-and-data-product-providers.pdf