**London Sets Stage for ESG Ratings Oversight**
The UK government has introduced legislation to bring Environmental, Social, and Governance (ESG) ratings providers under the supervision of the Financial Conduct Authority (FCA). This move is intended to instil order, reliability, and trust in a rapidly expanding segment of the sustainable finance market.
The reform, widely supported by investors and industry participants, grants the FCA legal authority to oversee the production and marketing of ESG ratings. This development addresses concerns over inconsistent methodologies and opaque scoring systems that have complicated investors’ ability to compare sustainability performance across companies and funds.
**Strengthening Trust and Market Integrity**
ESG ratings have become crucial inputs in global capital allocation, influencing investment decisions across various sectors and asset classes. The FCA stated that the legislation “provides the necessary powers to regulate ESG ratings providers—an important step toward ensuring transparency, reliability, and comparability.” The regulator emphasised that the framework would assist investors and companies in navigating an increasingly complex market, raising the bar for transparency and trust while ensuring competitiveness and resilience.
**Consultation on the Way**
With the legislation now before Parliament, the FCA plans to publish a consultation paper on its proposed rules before the end of 2025. These rules are expected to draw on recommendations from the International Organization of Securities Commissions (IOSCO), which has outlined global best practices for ESG data and ratings oversight.
The FCA’s draft regime will focus on transparency in methodologies, robust governance structures, sound systems and controls, and management of conflicts of interest. The regulator will also issue guidance to help firms determine whether their activities fall within the scope of regulation and whether they need FCA authorisation.
The move aligns the UK with regulatory developments in the European Union, Japan, and Singapore, where authorities are also formalising oversight of ESG ratings. For institutional investors and asset managers, consistent regulation across jurisdictions could simplify compliance and improve the quality of sustainability data feeding into investment models.
Financial institutions have long warned that divergent methodologies risk distorting capital flows meant to support the transition to a low-carbon economy. By imposing baseline standards, the FCA aims to ensure that ratings reflect credible, comparable data, mitigating greenwashing risks and enhancing investor confidence.
**Supporting the UK’s Sustainable Finance Ambitions**
The FCA described the reform as central to strengthening the UK’s role as a global sustainable finance hub. By embedding transparency and accountability in ESG data services, the new regime is intended to attract long-term green investment while safeguarding market integrity. The regulator also stressed that oversight would be “proportionate and innovation-friendly,” balancing investor protection with the need to foster growth in sustainability-linked financial services.
**Global Relevance**
The UK’s decision comes amid growing international scrutiny of ESG data quality and methodologies. As more jurisdictions move to standardise the space, London’s approach could serve as a template for other markets seeking to regulate without stifling innovation.
For C-suite leaders, investors, and policymakers, the legislation represents more than a domestic policy shift—it signals a recalibration of the global ESG infrastructure. With the FCA set to unveil its detailed consultation later this year, market participants are preparing for a new era of accountability and comparability in sustainable finance.
