FCA announces plans toregulate ESG ratings providers

The FCA has taken a major step in addressing concernsrelating to the transparency and trustworthiness of environmental, social andgovernance (ESG) ratings, announcing proposals to regulate ratings providers.According to the FCA, the move could deliver £500 million in benefits over thenext decade[i].

Global spending on ESG data is anticipated to top $2.2billion this year, with ESG ratings a critical aspect of business operations-informing investment decisions, risk management, and regulatory reporting.

Sacha Sadan, Director of Sustainable Finance at the FCA, hassaid: “Our proposals will give those who use ESG ratings greater trust andconfidence, supporting our goal of increasing trust and transparency insustainable finance.”[ii]He adds: “This will enhance the UK’s reputation as a global sustainable financehub- attracting investment and supporting growth and innovation.”[iii]

The proposals follow the UK government’s recent decision tobring ESG ratings within the FCA’s remit. This change was supported by 95% ofthose who responded to a consultation on the matter, where it was felt that introducingclear, proportionate rules for transparency and governance would help to buildthe market’s trust in ESG ratings and address concerns. 

Further, research from the FCA shows around half of thosewho use ESG ratings are worried about how they are built (55%) and howtransparent they are (48%). The proposals aim to address this and focus on 4areas:

• Increased transparency – allowing easier comparisons for the benefit of both those who use ratings and those who are rated.
• Improved governance, systems and controls – to ensure clear decision-making and strong oversight and quality assurance.
• Identification and management of conflicts of interest.
• Setting clear expectations for stakeholder engagement and complaints handling.

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In addition, the Authority is considering proposals onapplying existing rules to firms coming into the FCA’s remit- these aredesigned to be proportionate to both business size and risk. The FCA argues that strengthened market trust through proportionate oversightbenefits business, reinforcing the UK’s reputation as a global sustainablefinance hub, supporting innovation and continued growth. It will also benefitthe government’s commitment to sustainable finance in its industrial strategy. 

The proposals draw on the existing voluntary industry code of conduct andInternational Organization of Securities Commissions (IOSCO) recommendations tosupport consistency and international competitiveness. A consultation on theFCA’s new measures is now open and will run until 31^st March 2026,after which finalised rules are expected in Q4 2026, before the new regime isscheduled to come into effect from June 2028.

References

[i] FCAsets out proposals to make ESG ratings transparent, reliable and comparable |FCA

[ii]Ibid

[iii]Ibid

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