Japan’s Financial Services Agency (FSA) is in the process of finalizing a draft of its code of conduct for ESG data and ratings providers, making it the first country to implement nation-wide ESG guidelines.
Japan’s Coming Code of Conduct
After receiving industry feedback to its draft ESG guidelines published in July of this year, the FSA is expected to finalize its code of conduct later this month in order to ensure the quality of ESG data and the processes that back ESG ratings.
The FSA has taken a flexible principles based approach to its code of conduct, and it is based on recommendations from the International Organization of Securities Commission (IOSCO). Once published, Japan will be the first country to establish guidelines for ESG data and ratings providers.
Hideki Takada, director for strategy development at the FSA explained the agency’s rationale for implementing these guidelines, saying “We hope that the code of conduct will improve the transparency and fairness of ESG data and assessment services, as well as the development of the ESG market.”
Two of the largest providers of ESG ratings and data, Sustainalytics and Institutional Shareholder Services, have said they support the FSA’s voluntary, principles-based approach to its code of conduct. Despite this, a few large ESG ratings and data providers argue that Japan should focus its guidelines on ESG ratings, and that ESG data should not be treated any differently than other financial market data.
For the past few years, global securities regulators have been increasingly concerned about the ESG ratings industry. In 2022, at least four regulators—including the European Securities and Markets Authority and the Securities and Exchange Board of India—have proposed regulating the ESG ratings sector.
Japan’s expected move to establish a voluntary code of conduct for ESG ratings and data providers marks the first time that a country has adopted regulations overseeing this fast growing sector. However, we suspect that a number of other countries will roll out similar regulations in 2023, including Singapore, the UK, India and the EU.
The big question is whether the FSA’s voluntary approach will gain much traction, particularly when many of the largest players in the space disagree with Japan’s approach in regulating BOTH the ESG ratings and data sectors. We will have to wait and see whether these players are able to convince the FSA to narrow its focus to ESG ratings, or whether some other compromise is able to be reached.