By Huw Jones
LONDON (Reuters) - Companies in Britain that compile the environmental, social and governance (ESG) ratings of different firms will face a new voluntary code of conduct ahead of potential regulations for a sector that channels trillions of dollars in investments.
Investors who want to put cash into sustainable companies rely heavily on the ratings firms to make stock picks, but the sector is not directly regulated in Britain.
Wednesday's announcement by the country's Financial Conduct Authority (FCA) came a year after the regulatory body appointed the International Capital Market Association, a fixed income trade body, and think-tank International Regulatory Strategy Group to assemble a working group to draft a code.
The group includes ESG raters such as the London Stock Exchange Group (LON:LSEG) and Moody's, along with investment manager M&G (LON:MNG) and law firm Slaughter and May.
"Today is an important step in increasing transparency and trust in the growing market for ESG data and ratings products," said Sacha Sadan, director of ESG at the FCA.
The code, which reflects recommendations from global securities watchdog IOSCO, covers governance at the raters, systems and controls to ensure high-quality ratings, managing conflicts of interest and transparency over methodologies.
Britain's voluntary approach contrasts with the European Union, which last month proposed a draft law to regulate ESG raters as regulators seek to crack down on greenwashing - or companies exaggerating their sustainability credentials.
British finance ministry officials are consulting on whether ESG raters should be formally regulated, a process that would take time to implement.
"The code will play an important role in raising standards in the short-term, as well as continuing to apply to any firms that fall out of the scope of potential future regulation," Sadan said.
A public consultation on the code runs until Oct. 5, with the final version due to be published at the end of the year.
S&P Global, MSCI and Morningstar's Sustainalytics are also among the biggest sellers of ESG ratings.