The UK government has unveiled draft legislation to regulate ESG ratings providers, aiming to bolster transparency and trust in ESG ratings amid their growing significance in investment decisions. Expected to be introduced in early 2025, the proposed law would place these providers under the supervision of the Financial Conduct Authority (FCA). 

The initiative follows a 2023 consultation where 95% of respondents, including 87% of ratings providers, supported regulation. Key concerns addressed include improving the transparency of methodologies and mitigating conflicts of interest. This aligns with recommendations from the International Organization of Securities Commissions (IOSCO), which in 2021 called for regulatory oversight in the ESG ratings space to enhance reliability and comparability. 

The proposal reflects global trends, with the EU recently introducing similar measures under the European Securities and Markets Authority (ESMA). The UK legislation would require ESG ratings providers to gain FCA authorization, ensuring they meet stringent criteria related to operational effectiveness and conflict management. These rules will apply to both domestic and international ratings accessible in the UK. 

Exemptions are planned for credit ratings and investment research providers already regulated by the FCA if ESG assessments are part of broader activities rather than standalone offerings. 

Economic Secretary Tulip Siddiq emphasized the initiative’s role in boosting investor confidence and combating greenwashing, projecting that it will support innovation and drive capital allocation in key sectors. With the global ESG market expected to surpass $40 trillion by 2030, the regulation aims to position the UK as a leader in sustainable investment. 

The legislation marks a significant step toward fostering a transparent and robust framework for ESG evaluations, supporting the UK’s broader carbon-neutral strategies and sustainability goals. 

Sources: 

https://www.esgtoday.com/uk-launches-proposed-law-to-regulate-esg-ratings-providers/ 

https://www.fca.org.uk/news/statements/fca-welcomes-move-bring-esg-ratings-providers-regulation 

https://www.pwc.co.uk/industries/financial-services/understanding-regulatory-developments/hm-treasury-launches-proposals-to-regulate-esg-ratings-providers.html 

https://iclg.com/news/21928-uk-prepares-to-regulate-esg-ratings-providers