South Africa’s ESG ratings and data market is moving into sharper regulatory focus, with the Financial Sector Conduct Authority (FSCA) exploring how best to oversee a fast-growing but uneven segment of the financial system.
In its Discussion Paper on ESG Rating Services and Data Providers, released for public consultation, the FSCA sets out three broad approaches drawn from global practice: formal regulation, voluntary industry codes, or incorporating ESG ratings into existing credit rating frameworks.
The paper does not propose a preferred model but seeks industry input to shape the direction of travel.
Surveys point to uneven integration and market fragmentation
The FSCA’s assessment is grounded in two industry surveys conducted in 2023.
A March 2023 survey of licensed credit rating agencies (CRAs) found that while ESG factors are incorporated into credit rating methodologies, they are not consistently embedded across governance structures, strategies, or internal frameworks.
CRAs stressed the need to distinguish between credit ratings and ESG ratings and favoured a principles-based approach aligned with the International Organization of Securities Commissions (IOSCO) – the global body of securities regulators established in 1983 to promote consistent standards across financial markets. IOSCO’s guidance focuses on transparency, governance, internal controls, and the management of conflicts of interest.
Survey responses supported greater transparency in methodologies but warned that standardisation could undermine independence and limit diversity in ESG assessments.
A second survey, conducted in August 2023 with ESG rating services and data providers, highlights a market that is active but inconsistent. Providers confirmed widespread use of ESG ratings across banks, asset managers, insurers, and exchanges, but pointed to significant variation in methodologies, data sources, and fee models.
Approaches differ by sector, size, and use case, with providers relying on a mix of proprietary, third-party, and public data. Both subscription-based and issuer-pay models are in use, raising potential conflict-of-interest concerns.
The FSCA notes that the quality of ESG ratings is closely tied to underlying corporate disclosures, which remain inconsistent and limit comparability.
Transparency, governance and conflicts at the centre
Across both surveys and international benchmarks, three recurring risks emerge:
- Limited transparency in methodologies and data sources;
- weak governance and internal controls; and
- conflicts of interest linked to business models.
These weaknesses affect how ESG ratings are interpreted and used in investment and risk decisions. The FSCA also cautions against over-reliance on ratings, noting that users need to understand how scores are constructed and what they measure.
Formal regulation: consistency and oversight, with higher cost
In jurisdictions such as the European Union and the United Kingdom, ESG rating providers are being brought into formal regulatory frameworks that require authorisation, ongoing supervision, and defined organisational standards.
These regimes place emphasis on transparency of methodologies, governance structures, and the management of conflicts of interest, closely reflecting IOSCO’s recommendations. The EU model, in particular, combines licensing with detailed disclosure requirements for both users and rated entities, supported by centralised supervision.
The FSCA notes that this approach strengthens comparability and credibility of ESG ratings, addressing key concerns around inconsistent methodologies and opaque data sources. It also improves market confidence by introducing clear accountability for providers.
However, the trade-off lies in cost and complexity. Formal regulation introduces compliance burdens for providers and may raise barriers to entry, particularly in a developing market. For South Africa, this raises questions around proportionality, market readiness, and whether the benefits of standardisation outweigh the potential impact on innovation and competition.
Voluntary codes: flexibility, but limited assurance
Japan and Singapore have adopted principles-based codes of conduct, built on IOSCO-aligned standards and typically applied on a “comply or explain” basis.
These frameworks focus on improving transparency, governance, and disclosure practices without imposing formal licensing or supervisory requirements. They allow ESG rating providers to retain flexibility in their methodologies and business models, which is particularly relevant in a market where approaches differ widely by sector and use case.
The FSCA acknowledges that this model supports innovation and reduces regulatory burden, making it more accessible for a developing ESG ecosystem.
At the same time, it points to limitations. Without enforceable requirements, voluntary codes rely on market discipline to drive compliance. This may not be sufficient to address persistent issues such as inconsistent methodologies, weak governance practices, and unmanaged conflicts of interest. The absence of formal oversight also limits the ability to ensure consistent application across providers.
Integration into existing frameworks: efficiency with gaps
India has incorporated ESG rating providers into its existing credit rating regulatory framework, extending oversight through established legislation and supervisory structures.
This model applies existing governance, disclosure, and conduct requirements to ESG activities, reducing duplication and allowing regulators to leverage existing capacity. It offers a more efficient route to oversight, particularly where resources are constrained.
The FSCA notes that this approach could be practical in the South African context, given existing regulatory frameworks for credit rating agencies.
However, ESG ratings differ from traditional credit ratings in several respects, including the diversity of methodologies, broader data inputs, and the range of use cases across investment, risk management, and disclosure. Integrating ESG ratings into existing frameworks may not fully address these differences and could limit the development of standards tailored to ESG-specific risks.
International standards as the common foundation
Across all three approaches, IOSCO and OECD recommendations provide a consistent reference point. These focus on improving transparency of methodologies and data sources, strengthening governance and internal controls, and ensuring that conflicts of interest are properly managed and disclosed.
The FSCA indicates that any South African approach is likely to draw on these principles, regardless of the regulatory model adopted. The key consideration is how these standards are implemented in a way that reflects local market conditions.
Implications for financial institutions
For financial institutions, the focus is shifting to how ESG ratings are selected, interpreted, and applied.
Firms relying on these ratings will need to assess the quality and origin of underlying data, understand differences in methodologies across providers, and identify potential conflicts embedded in fee structures. They will also need to recognise the limits of comparability between ratings, particularly where methodologies diverge.
As ESG considerations become more embedded in financial decision-making, scrutiny is extending beyond issuers to the tools and data used to assess them.
Consultation open
The FSCA has invited comments from ESG rating and data providers, users of ESG ratings, credit rating agencies, and other interested parties.
Submissions must be completed using the prescribed comment template set out in Annexure A of the Discussion Paper and submitted via email to FSCA.RFDStandards@fsca.co.za by no later than 30 April 2026.
Feedback will inform the development of South Africa’s sustainable finance regulatory and supervisory framework.
