The UK government has proposed a draft bill that will be presented to Parliament in the early part of 2025, outlining the regulations for ESG ratings providers. The proposed law will bring them under the purview of the Financial Conduct Authority to increase transparency and reliability in ESG ratings. This move aligns with the growing significance of ESG factors in investment decisions and addresses concerns over the lack of regulatory oversight in the sector.
The draft legislation follows a consultation initiated in early 2023 by the previous government, which highlighted the need for regulation. The consultation revealed strong market support, with 95% of respondents, including 87% of ESG ratings providers, agreeing on the necessity of regulatory measures. Areas of key priorities emphasized here included better visibility into methodology use and conflict of interest reduction. The rules would cover domestic UK-produced ratings and those from overseas firms available to UK users as a result of business relationships.
ESG ratings providers have to be authorized by the FCA and will be subject to strong conditions including regulated effectiveness, business models, and the standards. Certain providers-exclude here are those providers who are already subject to the regulation of the FCA, namely, credit rating and investment research firms-except to the extent that they may provide ESG ratings in line with a wider activities rather than being standalone products.
This is one of the international developments related to the regulation of ESG ratings providers. In 2021, the IOSCO “called upon all relevant global regulators to enhance both transparency and oversight in the ESG ratings and data space.” Subsequent jurisdictions include the EU that, during this time, established measures meant to enhance the reliability as well as the comparability of ESG ratings through grants of authority to the European Securities and Markets Authority over providers.
The UK government said that the implementation roadmap of the regulatory regime would be four years. Then, the FCA would design and consult on the first wave of policy proposals prior to any firms undergoing authorization once the regime takes effect following the enactment of legislation in 2025.
Economic secretary to the Treasury Tulip Siddiq said regulation was critical, noting that the global ESG market is set to grow to over $40 trillion by 2030. Siddiq said regulating ESG ratings providers would build investor confidence, reduce instances of greenwashing and increase transparency for investors therefore supporting innovation while opening investments in crucial sectors without punishing firms through opaque ratings.