FCA opens consultation on future of UK ESG ratings regulation

The Financial Conduct Authority (FCA), which took responsibility for oversight of ESG ratings earlier this year, has opened a consultation into how it should create a more reliable and comparable method for issuing ratings.

The ratings measure a company’s exposure to long-term environmental, social and governance issues, and are regularly used by investors as a guide to the firm’s risk management practices. Global spending on ESG data, including ratings, is projected to reach $2.2 billion this year. 

The consultation, which runs until March 2026, will focus on how to increase transparency, improve governance and controls, identify and manage conflicts of interest, and set clear paths for stakeholder engagement and complaint processes.

Under the proposals, any company looking to provide certain ESG ratings in the UK would need authorisation from the FCA from June 2028 onwards.

Hayden Morgan, an expert on sustainable finance and the use of ESG ratings with Pinsent Masons, said the move would bring much-needed consistency to the existing ratings market.

“For too long investors have been trying to fulfil fiduciary duties based on opaque, black box methodologies,” he said.

“These proposals reflect a desire for more transparency, which is important as investors need to consider sustainability performance as they assess future risks and opportunities as part of their fiduciary duty, and as part of an assessment of risk-adjusted financial returns when making capital allocation and investment decisions.

“There are still areas which need clarity however, including how these will be enforced on non-UK providers, and how robust the FCA will be in monitoring firms to ensure compliance.”

It comes after research by the FCA found more than half of firms who make use of ESG ratings for decision-making have concerns about their structure and transparency.

ESG ratings inform investment decisions, risk management and regulatory reporting.

The proposed regulation would be based on international standards and industry approaches set by the International Capital Market Association and the International Organization Of Securities Commissions, along with existing FCA rules.

“The FCA appears to have taken some care in creating a proposed regime that is proportionate to the risk created,” added Elizabeth Budd, an financial regulation expert with Pinsent Masons.

“This is reflected in its proposals regarding prudential and other requirements for the rating providers. Most of the new rules will be a new chapter to the ESG Handbook and those ratings providers who are in scope need to analyse that new chapter and assess what changes they need to implement to their activities to reach the FCA’s requirements.”