UK Plans Regulation for ESG Ratings Providers to Boost Transparency and Trust

The UK government has announced draft legislation aimed at regulating Environmental, Social, and Governance (ESG) ratings providers, with plans to introduce the finalized law to Parliament by early 2025. The new law will bring ESG ratings providers under the supervision of the Financial Conduct Authority (FCA), in an effort to improve transparency and trust in ESG ratings as investors increasingly use these metrics in decision-making.

This move follows a consultation launched in early 2023, which highlighted the need for regulation in this sector. Currently, the activities of ESG ratings providers are largely unregulated by financial market authorities. The draft legislation seeks to address this gap, as demand for ESG information grows and investors integrate ESG considerations into their capital allocation strategies.

In 2021, the International Organization of Securities Commissions (IOSCO) urged regulators to enhance oversight of ESG ratings and data providers, citing the importance of transparency. IOSCO also recommended that ESG ratings providers disclose potential conflicts of interest and make their methodologies more transparent. Since then, several jurisdictions, including the EU, have taken steps to bring ESG ratings under regulatory control, with the EU recently giving the European Securities and Markets Authority (ESMA) authority over ESG ratings providers.

Accompanying the draft legislation, the UK finance ministry, HM Treasury, also released its response to the 2023 consultation, which revealed strong market support for regulation. An overwhelming 95% of respondents—including 87% of ratings providers—agreed on the need for regulatory oversight of ESG ratings. Key areas of support included the need to improve transparency in ESG methodologies and to mitigate conflicts of interest.

Under the proposed legislation, ESG ratings providers will be required to become authorized by the FCA and meet a range of requirements, including an assessment of their business models and supervisory effectiveness. The regulations will apply to ratings produced in the UK as well as ratings created overseas but distributed to UK users through business relationships. The framework also outlines a four-year process for establishing the new regulatory regime, with legislation being introduced in 2025, followed by policy development, consultations, and an authorization process before the regulation goes live.

The draft also outlines specific exclusions, such as for credit ratings and investment research providers already regulated by the FCA that provide ESG ratings as part of broader services. These entities will not fall under the new ESG-specific regulations.

Economic Secretary to the Treasury & City Minister Tulip Siddiq emphasized the importance of regulation, stating, “With the global ESG market predicted to surpass $40 trillion by 2030, investors and markets are making increasing use of ESG ratings to inform investment decisions and capital allocation. Bringing ESG ratings providers into regulation will boost investor confidence, reduce greenwashing, and address the lack of transparency highlighted in responses to the government’s consultation. This will help to drive investment, support innovation, and ensure that companies in critical sectors are not penalized by opaque ratings.”