By Huw Jones

LONDON (Reuters) – Britain should regulate corporate sustainability ratings to improve transparency, reduce the risk of green laundering and protect investors, a regulatory research body said on Monday.

The wall of money invested in environmental, social and governance (ESG) funds has raised concerns among regulators about greenwashing, when sustainability credentials are exaggerated to attract money from investors.

The International Regulatory Strategy Group (IRSG) said in a report that the use of ratings was growing rapidly and investors needed to be confident that the market was operating with a high degree of integrity.

“While ESG ratings only provide one interpretation of the many ESG data sources available to portfolio managers, the growing importance of ESG rating products in the equity and fixed income markets cannot be understated. estimated,” the IRSG said.

Currently, asset managers typically use largely unregulated ratings on a company’s ESG credentials to select stocks on behalf of investors and pension funds.

The IRSG, sponsored by TheCityUK and the City of London Corporation, called for a set of proportionate and principled rules that dovetail with global efforts to bring consistency and standardization to data and protect investors.

“The IRSG believes that regulation of ESG ratings is now desirable, to provide more transparency around the basis of ESG ratings and to mitigate potential conduct risk,” he said.

Britain’s Financial Conduct Authority consulted last year on whether there should be voluntary ‘best practice’ guidelines for ESG assessors or binding regulation, with the result expected this year.

The European Union’s securities watchdog, ESMA, is also studying the sector ahead of possible EU regulation, while the global securities body, IOSCO, has presented its first global framework last November to open the “black box” of ESG ratings.

The IRSG said a comprehensive approach was needed to avoid fragmentation of rules that would increase compliance costs.

“Increased efforts are needed to improve the quality, consistency and availability of underlying data to ensure market confidence in ESG products,” says the report produced with consultants Accenture.

(Reporting by Huw Jones; Editing by David Clarke)