The Financial Conduct Authority (FCA), the UK’s regulator for financial services and markets, has announced new proposals for transparency, governance, and conflict of interest management for ESG ratings providers. This follows the recent UK government legislation aimed at regulating these providers under the FCA’s oversight, applicable to both domestic and foreign entities offering ESG ratings in the UK.
The FCA’s initiative seeks to make ESG ratings more transparent and reliable. Research from the FCA indicates widespread concerns among users about the systems and controls of ESG rating providers, including the use of outdated data and a lack of transparency in methodologies and data sources. There are also apprehensions about potential conflicts of interest affecting the ratings.
The FCA stated: “Introducing clear, proportionate rules for transparency and governance will help to build the market’s trust in ESG ratings and address concerns.”
In 2021, the International Organization of Securities Commissions (IOSCO) recommended that regulators enhance transparency in ESG ratings and data and apply regulatory oversight. The FCA’s proposals align with these recommendations and incorporate the International Capital Market Association’s (ICMA) Code of Conduct for ESG ratings and data products providers, which was developed with FCA’s assistance to ensure consistency and competitiveness internationally.
The proposed regulations focus on four key areas: increased transparency, improved governance, systems and controls, conflict of interest management, and stakeholder engagement and complaints handling. Transparency improvements include mandatory public disclosures by ESG ratings providers about their products’ objectives, the dimensions assessed, and the methodology used.
Governance proposals require providers to implement robust arrangements proportional to their size and complexity, ensuring thorough analyses and consistent application of methodologies. Providers must also maintain internal records and have clear procedures for reviewing methodologies and managing data quality. An appropriate UK presence is required for effective supervision.
Further requirements include identifying and managing conflicts of interest, with systems to prevent and record such conflicts, and having a transparent policy in place. Stakeholder engagement rules mandate notifying rated entities before issuing ratings, allowing for correction of errors, and establishing procedures for feedback from stakeholders.
Sacha Sadan, Director of Sustainable Finance at the FCA, commented: “Our proposals will give those who use ESG ratings greater trust and confidence – supporting our goal of increasing trust and transparency in sustainable finance. This will enhance the UK’s reputation as a global sustainable finance hub – attracting investment and supporting growth and innovation.”
The FCA has opened a consultation on the proposals, which will run until March 2026. The final rules are expected to be established by Q4 2026, with the new requirements coming into effect from June 2028.
For more details, access the FCA’s consultation paper.
