The UK government has introduced and finalized legislation that will bring environmental, social, and governance ratings providers (ESG ERPs) under the statutory oversight of the Financial Conduct Authority (FCA).
The move is designed to address concerns over the rapidly growing but currently unregulated ESG ratings market, particularly issues of transparency, conflicts of interest, and greenwashing. The new law requires both domestic and foreign providers offering ratings to UK customers to be authorized and supervised by the FCA.
Four focus areas:
In response to the new powers, the FCA welcomed the legislation and announced plans to consult on its proposed rules before the end of the year. The regulator’s regime will be informed by the recommendations of the International Organization of Securities Commissions (IOSCO) and will focus on four core pillars:
Transparency: Ensuring clear disclosure of methodologies and data.
Governance: Establishing robust organizational structures for ratings providers.
Systems and Controls: Requiring sound internal processes.
Conflicts of Interest: Mandating the identification and management of potential conflicts.
Tackling greenwashing:
The legislation recognizes that ESG ratings play a “critical role” in influencing billions in investment and capital allocation, yet a lack of formal oversight has led to stakeholder concerns.
The new regulatory framework aims to ensure that ESG ratings are transparent, reliable, and comparable, thereby boosting investor confidence and reducing the risk of misleading environmental claims (greenwashing).
The regulation of ESG ratings providers under the new legislation is expected to come into effect in June 2028.
