ESG Ratings & Data: The Gap Behind Trillions

A handful of firms whose scores shape how trillions get allocated — MSCI ESG, Sustainalytics, S&P, CDP and their peers. In Hong Kong they are unlicensed and subject to no mandatory rules. On 3 October 2024, an SFC-sponsored industry working group launched a Voluntary Code of Conduct (VCoC) — ICMA as secretariat, five providers signing within the first month. This piece analyses why "voluntary" beat "licensing," and the risk the gap leaves behind.

The code's four pillars

The VCoC follows IOSCO's 2021 recommendations: transparency (methodologies and assumptions disclosed), governance (accountability over the rating process), systems and controls (data quality and methodology stability), and conflict-of-interest management (e.g., walls between rating and advisory arms). Signatories must file public self-attestation documents explaining how they comply — published on the VCoC website expressly so users (like licensed fund managers) can run due-diligence comparisons.

Why not licensing?

The policy logic: ESG ratings are a fast-evolving young industry; one-size licensing could kill innovation, erect entry barriers and entrench a few large players. A voluntary code substitutes information symmetry for admission control — force providers to disclose methodology, then let the market (users' due diligence) weed out the weak. This matches the early UK/EU trajectory. The cost: non-signatory providers can still do business in Hong Kong — and their clients, regulated asset managers, carry the due-diligence duty.

Gaps still open

• Non-signatory providers — may keep operating in Hong Kong; users must diligence them alone
• Rating divergence — different agencies can rate the same company completely differently; no reconciliation mechanism
• Small providers — the code's compliance cost is itself an entry barrier, potentially driving consolidation
• Escalation path — if voluntary fails, licensing is the next step — IOSCO's report itself lists legislation as an option

Official sources