Submission on the Consultation on Draft Hong Kong Code of Conduct for ESG Ratings and Data Products Providers

1. The Consumer Council (the Council) is pleased to submit its views with respect to the consultation issued by the Hong Kong Environmental, Social and Governance (ESG) Ratings and Data Products Providers Voluntary Code of Conduct Working Group (VCWG), an industry working group sponsored by the Hong Kong Securities and Futures Commission (SFC), on the draft Code of Conduct for ESG Ratings and Data Products Providers (the Code).

The Council’s Overall View

2. Given the global trend of ESG investing, it is likely that retail investors, many of whom are general consumers, will increasingly consider ESG factors in making the decision to invest in companies or financial instruments. 

3. The Council welcomes the development of a voluntary code of conduct for the ESG ratings and data products providers’ operations, considering that it can further strengthen consumer trust and reduce the risk of greenwashing.  ESG ratings and data products providers (Providers) can assist consumers by simplifying a broad range of information and data about companies’ and financial instruments’ ESG performance into easy‑to‑understand and decision‑useful information and analysis.  The Code may help ensure the information provided by these Providers is trustworthy and transparent.  

4. In the following parts, the Council puts forward its responses to the consultation questions from a consumer protection perspective.

Responses to Consultation Questions

Comprehensiveness of the Draft Code (Consultation Question 1)

Principle on Securing Quality (Systems and Controls)

5. The Council notes that Clauses 2.3 to 2.6 of the draft Code specify what basis that ESG ratings or data products should be based on.  The Council opines that the production of such ratings or data products should be based on standards, methodologies or frameworks that are internationally or locally-recognised, as the Council considers it optimal for Providers to come up with ratings and data products in a credible manner and via similar approaches.  This would enable a fair comparison between different companies and data products, facilitate understanding of consumers, and avoid concerns or suspicions that the ratings and data products are based upon self‑defined preferences. 

6. The Council notes that Clause 2.8 of the draft Code requires Providers to ensure that “they monitor on an ongoing basis and regularly update their ESG ratings and data products”.  The Council suggests that the Code might provide further guidance such as to specify the frequency and conditions of monitoring, reviewing, and updating the ESG rating.  For example, when Providers are aware of any information that might be expected to result in a revision of the ESG rating, a review shall be conducted.  

7. Moreover, the Council recommends Providers to maintain records to support every ESG rating and data products that the Provider issues.  To take as reference, Singapore’s Code of Conduct for ESG Rating and Data Product Providers requires such records to be kept for at least 6 years from the issue date of the relevant ESG rating and data products_[1].

8. With regard to Clause 2.11 in the draft Code about requiring Providers to ensure they have sufficient resources to make high‑quality ESG ratings and data products, the Council further suggests adding that if there is any limitation of the assessment, the Provider should specify this in a prominent place along with the ESG ratings and data products. 

Principle on Conflicts of Interest

9. According to the SFC’s “Report on the fact-finding exercises on ESG ratings and data products providers” in October 2023, 30% of surveyed Providers offered ESG related consulting or advisory services in Hong Kong, apart from ESG assessment services_[2].  To avoid potential conflicts of interest, the Council suggests the VCWG to make reference to the proposals in the European Union that ESG rating providers shall not provide consulting services for undertakings_[3], and consider whether such requirements shall be included in the draft Code to alleviate potential conflicts of interest.  Such practices also align with the Code of Conduct for Persons Providing Credit Rating Services by the SFC_[4]. 

10. In addition to Clauses 3.4 to 3.11 of the draft Code, the Council also suggests the VCWG to consider setting requirements regarding the fee models used by Providers.  For example, Singapore’s Code of Conduct for ESG Rating and Data Product Providers specifies that Providers should not enter into any contingent fee arrangement for providing ESG rating service for issuer‑paid ratings_[5] (a contingent fee where the amount of which is determined by reference to the outcome of a transaction or the result of services provided by the Provider).  This may further improve trustworthiness of the assessment.  

Principle on Transparency

11. The Council concurs with Clause 4.1 of the draft Code that Providers should disclose and be transparent around the methodologies and processes used in producing ESG ratings and data products.  Additionally, the Council suggests Providers to provide further information on what kinds of data are used to determine ESG ratings and data products, such as whether the data is primary data, estimated data, or data that has been analysed via the use of artificial intelligence; how the data is sourced, such as whether it is publicly available or proprietary in nature, or whether it has been scraped from the internet using automatic tools; as well as the time period that the data is relevant to.  This can help consumers to better understand the applicability and constraints of the ESG ratings and data products.

12. Furthermore, the Council foresees that the public will increasingly be interested in ESG ratings and data products.  As such, the Council opines that Providers should strive to use layman language in disclosures and explanations.  At the same time, as the public becomes more receptive towards ESG ratings and data products, this opens up opportunities for their marketing or advertising, accompanied by risks of misrepresentation or exaggeration.  The Council emphasises that communications by Providers should be grounded upon facts and be comprehensive, clear, and easy to understand.

Attestation Document (Consultation Question 3)

13. While noting that the self-attestation document (Annex 3 of the draft Code) provides a good template for Providers, the Council considers that “date” field should be more specific to enable the public to understand whether this refers to the date of assessment, date of publication, or date of update.  If the assessment is conducted by a third-party, the name of the assessor should be indicated clearly.

14. To improve the readability for the public, the VCWG may consider supplementing the field of implementation of principles or actions by adding the fields “yes”, “no” or “not applicable”, such that signatories may indicate their implementation of principles or actions and further explain how a principle or action has been implemented.  In the case of non‑implementation, signatories may indicate the reasons for non‑implementation, whether they plan to implement and the target date of implementation. 

Conclusion

15. To alleviate the risk of greenwashing and avoid the misuse of ESG ratings in marketing, the Council hopes the VCWG and the SFC will closely monitor the signatory organisations and undertake publicity efforts concerning the voluntary Code once it takes effect, such as encouraging the public to visit the ICMA website for an up-to-date signatory list of Providers whenever necessary. 

16. Internationally, the regulatory landscape is continuously evolving, for example, the European Union is considering new rules that would require ESG rating providers to be authorised and supervised by the European Securities and Markets Authority_[6].  The Council urges the VCWG and the SFC to monitor and assess the effectiveness of the voluntary Code, keep close eyes on developments in the industry globally, and update Hong Kong’s regulatory regime if the need arises, so as to protect the interests of users of ESG ratings and data products.