The UK Government has introduced its finalised legislation in Parliament to regulate ESG ratings providers, bringing them under the supervision of the Financial Conduct Authority (FCA). This move follows a 2021 call by the International Organization of Securities Commissions (IOSCO) for regulators to enhance transparency in the ESG ratings and data space and to implement regulatory oversight. IOSCO provided recommendations for regulators, such as requiring providers to disclose potential conflicts of interest and to evaluate the data and methodologies they use.
The previous UK government initiated a consultation in 2023 to assess the need for regulation of ESG ratings providers, which led to the current administration’s introduction of draft legislation in 2024. Under the new law, ESG ratings providers operating in the UK will be required to obtain authorisation from the FCA. This requirement will apply to both UK-based providers and foreign providers offering ESG ratings within the UK.
In a statement welcoming the new legislation, the FCA announced that it is developing a regulatory regime for ESG ratings, with plans to introduce proposed rules by the end of the year. The FCA’s proposals will be informed by IOSCO’s recommendations and will focus on transparency, governance, systems and controls, and conflicts of interest. The regulator also plans to issue guidance to help firms determine whether their activities will require FCA authorisation.
The FCA stated: “ESG ratings continue to play a critical role in influencing investment and capital allocation decisions. The legislation, which was broadly supported by the industry, will provide us with the necessary powers to regulate ESG ratings providers – an important step towards ensuring that there are transparent, reliable and comparable ESG ratings.”
The regulation of ESG ratings providers under the new legislation will take effect in June 2028.
