By Huw Jones
LONDON (Reuters) - Rules may be needed to stop the risk of greenwashing from "totally unregulated" environment, social and governance (ESG) ratings used for investing in sustainable assets, an official from Britain's finance ministry said on Monday.
Adam Lyons, head of the ministry's green finance unit, said greenwashing, or unsubstantiated claims about corporate ESG credentials, was a serious problem in financial markets.
The ministry will this year work with the Financial Conduct Authority (FCA) and raters to understand the issues affecting the sector and whether it should be brought inside the regulatory perimeter, Lyons said.
"The rationale is that it's an increasingly important part of investment decision-making, but it's currently totally unregulated," Lyons told a Westminster Forum Projects event.
The FCA said last year that ESG ratings needed tighter oversight. Major raters include Moody's, MSCI and Morningstar.
"In terms of what that would look like, I think the first thing to say it's definitely not being regulation focused on what the ratings are that ratings agencies are developing," Lyons said.
"It will be much more focused on ensuring proper practice, like declarations of conflicts of interest, for example ... it's much more about transparency."
Global securities regulatory body IOSCO said last year that national watchdogs should consider regulating ESG raters, which have become more important as investors demand more ESG-related data on companies.
Britain wants to become the world's first net-zero aligned financial centre, offering expertise in green finance.
In April it became the first major economy to make climate-related company disclosures mandatory for more than 1,300 companies, in line with the global Taskforce on Climate-related Financial Disclosures (TCFD).
A new International Sustainability Standards Board is writing what it aims to be the world's first baseline sustainability disclosure standards for companies, building on the TCFD.
"We very much see the TCFD mandatory standards that we have in place being replaced by the ISSB standards," Adams said, adding this would be subject to public consultation within a formal adoption process.
(Reporting by Huw Jones; Editing by Mark Potter)