Singapore finalises code of conduct for ESG rating and data product providers

On 6 December 2023, the Monetary Authority of Singapore (MAS) published its responses to the public consultation (the Responses) and the finalised Code of Conduct for ESG Rating and Data Product Providers (the Code), together with a checklist for providers to self-attest their compliance with the Code. 

The public consultation ran from June to August 2023 (see our previous client briefing on the consultation). 

The Code, which sets a voluntary standard of best practice within the ESG data and ratings market, builds upon the International Organisation of Securities Commissions’ (IOSCO) recommendations for such providers published in November 2021. The Code aims to establish baseline industry standards for transparency in methodologies and data sources, governance, and management of conflicts of interest that may compromise the reliability and independence of the products.

We summarise MAS’ Responses below:

Scope of product and providers

The majority of the respondents were supportive of the proposed definitions of “ESG Rating” and “ESG Data Product”, with feedback on sharpening the scope of products and providers. The MAS agreed to refine the definitions, taking into account the policy intent of the Code and other jurisdictions’ approaches. For instance, the definitions in the revised Code exclude proxy advisory services and proprietary products for intra-group use, as well as providers that solely compile or redistribute data. Additionally, the MAS clarified that an “ESG score” would be caught in the scope of the Code as it has characteristics of an “ESG rating”. 

Second Party Opinions (SPOs)

The MAS decided not to specifically carve out SPOs, as the feedback received was evenly split, and other jurisdictions adopted differing approaches. Nonetheless, the MAS indicated that (i) the current definitions of “ESG data product” and “ESG data product provider” are sufficiently broad to cover SPOs, and (ii) the adoption of the Code is on a voluntary basis so SPO providers can opt to adopt the Code. The MAS will continue monitoring the regulatory landscape and may adjust the proposed regulatory treatment accordingly.

Disclosures of forward-looking elements

The majority of the respondents supported the disclosure of forward-looking elements in ESG rating and data products. Some respondents called for the MAS to provide additional guidance on the granularity of such disclosures. The MAS decided to maintain the current drafting in Best Practice 4e under Principle 4 of the Code to align with a principle-based approach for the Code. The MAS also provided some examples of forward-looking elements that providers may consider disclosing.

Principles and Best Practices set out in the Code

Respondents generally supported the best practices set out in the draft Code as they are aligned to the good practices recommended by IOSCO, though some respondents suggested imposing more stringent best practices (e.g. subjecting providers to competency requirements such as specific ESG qualifications or training / assessments.) The MAS indicated that more stringent best practices may be considered when the ESG rating and data products industry further develops, or when global baseline standards have evolved further.

There was significant feedback relating to Best Practices under Principles 1 and 2 of the Code:

Principle 1: Issuance of high quality ESG rating and data products

• The MAS acknowledged the potential challenges faced by providers on the requirement for them to communicate any methodology changes made, and the potential impact of such changes. The MAS will refine Best Practice 1d to require such disclosures where the changes are material and/or impacting the final rating. 
• The MAS indicated that the use of quality data is expected from providers in providing quality assurance to their users, hence it will refine Best Practice 1i to cite the verification of data sources as an example of quality assurance. 

Principle 2: Conflicts of interest management

The MAS clarified that the policy intent of Best Practice 2f is to ensure that analysts are not perversely incentivised by the fees paid by the covered entity to provide a favourable assessment, regardless of the business model. The MAS recognised the need for the provision to be broad enough to cater to different business models, hence it refined the Best Practice by replacing the term “personnel” (which could reference a team) with the term “employee/agent” (which more precisely refers to an individual). 

Adoption of the Code

After careful consideration, the MAS will proceed with the “comply or explain” approach for providers to adopt the Code, together with the checklist to guide providers in attesting their adoption of the Code. This was supported by most respondents.

Respondents supported clear identification of (i) the respective best practices in the Code that are aligned to IOSCO’s recommended good practices, and (ii) the additional best practices specific to Singapore within the checklist. They have also suggested for providers to supplement their self-attestations in the checklist with links to their policies and procedures and adding a “Not Applicable” column to the checklist to clarify that a particular Best Practice does not apply to their business model or product (instead of checking off “No”). The MAS agreed and have amended the checklist to take account of the suggestions. 

The MAS agrees that third party assurance can provide users with greater confidence in their providers’ attestation of their adoption of the Code. However, the MAS will leave the decision to providers, on whether they wish to conduct third party assurances of their attestations.

As users are keen to identify providers which adopt the Code, the MAS encouraged providers to use the checklist for their self-attestation as soon as possible and in any event, by December 2024.

Capital Markets Services (CMS) Licensing Regime 

Respondents are supportive of the proposed phased approach towards regulating the ESG rating providers as CMS licensees under the Securities and Futures Act 2001. 

They have also commented on factors and milestones the MAS should consider before formalising a regulatory regime and requesting for treatment of equivalence or third country recognition for providers who operate out of IOSCO-aligned jurisdictions which prescribe more robust and stringent regulations. Some providers proposed that such equivalence be applied to overseas based ESG rating providers, in place of a local licensing regime, to reduce duplicative requirements imposed on them. 

The MAS will take the feedback into consideration when developing a regulatory regime for ESG rating providers. The MAS will further consult the public on licensing and regulatory requirements when it takes formal steps towards developing the regulatory regime.

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The Code is a step taken to boost market confidence in a nascent sector, providing a baseline transparency standard to reassure users of its providers’ commitments.