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ESG benchmarks review: the FCA's final warning

Posted on 31 March 2023

On 20 March 2023, the FCA issued a Dear CEO letter (the "March Letter") setting out conclusions from its preliminary review on ESG benchmarks.

The FCA's "initial supervisory findings…indicate the potential for widespread failings". The FCA's pointed observations led it to conclude that "where firms fail to consider [the FCA's] feedback…we will deploy…formal supervisory tools and, where appropriate, consider enforcement action". This article will consider: (1) the background to the March Letter, (2) key observations and issues identified from the March Letter, and (3) offer points for reflection.


The FCA has made clear that the ESG space is a priority. A key aspect of the FCA's Business Plan 2022/23 is ensuring "an effective ESG ecosystem to support integrity in the market for ESG-labelled securities". Further, the FCA's strategy for positive change highlights that it is "targeting potential harms to market integrity and consumers as companies and firms adapt to the unfolding ESG landscape."

Benchmarks and the role played by benchmark administrators are an integral part of the ESG eco-system and landscape. On 8 September 2022, the FCA issued a portfolio letter to benchmark administrators outlining its supervisory priorities and views of risks within the sector (the September Letter). The September Letter stated that the FCA had "particular concerns in relation to ESG benchmarks". A key observation from the September Letter concerned the subjective nature of ESG factors, and how the way that ESG data and rating are incorporated into benchmark methodologies could increase the risk of poor disclosures. Some of the key observations in the September Letter are similar to those found in the March Letter.

Key observations and issues identified from the March Letter

The key observations and issues identified from the March Letter were pointed. These include, among others:

  • Disclosures: In general, the quality of disclosures made by a sample of UK benchmark administrators was poor.
  • Methodology: There were often instances where benchmark administrators did not provide sufficient detail and description of the ESG factors considered in their benchmark methodologies. There were examples where benchmark administrators had failed to implement their ESG benchmarks' methodologies correctly.  
  • Quality and verification: None of the benchmark administrators provided sufficient information on the data and standard used. Descriptions on how data is verified and how the quality of data is ensured were particularly poor.  

Points for reflection

In the March Letter, the FCA reiterated the role the financial sector has to play in supporting the transition to a more sustainable future and stressed that market participants and financial services firms need high-quality information, a well-functioning ecosystem and clear standards.

Ineffective benchmarks will obviously be detrimental to achieving the FCA's above stated goal. The methodology used, how they are verified, and the disclosures made by benchmark administrators will be instrumental in achieving the FCA's goal in this space.

The March Letter also sets out that senior leadership and the Board at applicable regulated firms should carefully consider the messages in this letter. The FCA makes clear that it will expect applicable regulated firms to have appropriate strategies in place to address these issues, and to be able to explain these strategies on request. Reference was also made to the proposed new anti-greenwashing rule. This rule reiterates requirements that all regulated firms making sustainability-related claims must ensure these are clear, fair and not misleading. It will be interesting to see the FCA's next steps in this space given the clear warning and expectations set out.

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