The UK Government introduced its finalized law to regulate ESG ratings providers in Parliament, with the new legislation bringing the providers under the supervision of the Financial Conduct Authority (FCA).
The new legislation follows a call by securities regulator standards setter IOSCO in 2021 for regulators to focus on improving transparency in the ESG ratings and data space, and to begin to apply regulatory oversight. IOSCO also provided a series of recommendations for regulators, such as requiring providers to identify and disclose potential conflicts of interest, and to consider the data and methodologies used by the providers.
The prior UK government launched a consultation in 2023 assessing the need to regulate ESG ratings providers, which was followed up by the current administration in 2024 with draft legislation.
Under the new legislation, ESG ratings providers operating in the UK will be required to become authorized by the FCA. The law will apply to UK-based providers, as well as foreign providers offering ESG ratings in the UK.
In a statement welcoming the new legislation, the FCA said that it is already in the process of developing its regulation regime for ESG ratings, with plans to introduce proposed rules by the end of this year.
The FCA said that its planned proposals will be informed by the IOSCO recommendations, and will focus on the four key areas of transparency, governance, systems and controls, and conflicts of interest. The regulator added that it will also produce guidance to help firms assess whether their activities will fall under regulation and require FCA authorization.
The FCA said:
“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.”
Regulation of ESG ratings providers under the new legislation will come into effect in June 2028.
