ESG ratings agencies will be regulated by the FCA, as it seeks to increase transparency and reduce conflicts of interest in this area.
The regulator said it had come across a number of potential issues, with firms often unclear about how these ratings are devised. It also highlighted more serious conflicts of interest — including agencies charging companies for both ratings and consultancy services and analysts using ratings information to trade securities.
Overall the FC said that more than half of the firms (55 per cent) using ESG ratings — including pension providers and asset managers — are worried about how they are built, and 48 per cent are concerned about their transparency.
It said the decision to bring these ratings agencies within FCA’s remit, supported by 95 per cent of firms who responded to an earlier consultation.
Publishing its consolation on these proposed regulations, the FCA said they were “essential” for market confidence and effective decision making, as the UK seeks to become a global hub in sustainable finance. This is part of its wider remit, set by the Government promote growth in the UK.
This is a growing market, with the FCA stating that global spending on ESG data, including ratings, is projected to reach $2.2bn in 2025. Data companies will not be regulated, just those compiling ESG ratings.
The FCA said it wanted to ensure these rating were reliable and comparable, and that the pension providers and asset managers utilising this data were clearly able to see the methodology being used.
The proposals focus on four areas:
- Increased transparency – allowing easier comparisons for the benefit of both those who use ratings and those who are rated
- Improved governance, systems and controls – to ensure clear decision-making and strong oversight and quality assurance
- Identification and management of conflicts of interest
- Setting clear expectations for stakeholder engagement and complaints handling
There are also proposals on applying existing FCA rules to firms coming into the FCA’s remit. The regulator said the proposed rules are designed to be proportionate to business size and risk, while addressing current concerns.
FCA director of sustainable finance Sacha Sadan says: “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 proposals draw on the existing voluntary industry code of conduct and International Organization of Securities Commissions (IOSCO) recommendations to support consistency and international competitiveness.
The consultation is open until 31 March 2026, with final rules expected before the end of 2026, with a view that this new regime will come into effect from June 2028.