The UK’s financial watchdog is preparing to bring Environmental, Social and Governance (ESG) ratings agencies under formal regulation for the first time, in what is being described as the most sweeping overhaul of sustainable finance rules in the country’s history.
The Financial Conduct Authority (FCA) has launched a consultation setting out plans to police the rapidly expanding ESG ratings sector, which has grown into a $2.2bn (£1.6bn) global industry as investment managers increasingly embed ESG criteria into their strategies.
Ratings agencies assess companies and funds on environmental impact, social responsibility and governance standards. But the sector’s explosive growth has triggered persistent concerns about inconsistent scoring, opaque methodologies and potential conflicts of interest, particularly where ratings providers also offer consultancy services to the same firms they assess.
Under the FCA’s proposals, agencies would be required to disclose their methodologies and data sources, and identify and manage any conflicts. The move follows warnings from investors and regulators worldwide that divergent ESG scoring practices undermine confidence in sustainable finance.
James Alexander, chief executive of the UK Sustainable Investment and Finance Association, welcomed the proposals. “We particularly welcome the emphasis on transparency and consistency with international standards,” he said, noting alignment with earlier recommendations from the International Organisation of Securities Commissions (IOSCO).
The government’s decision to back FCA oversight comes despite the Chancellor and Prime Minister pushing regulators to slash “excessive red tape” in a bid to stimulate economic growth. Ministers wrote to major regulators last year demanding proposals to lighten regulatory burdens on businesses.
Nevertheless, the FCA says regulating ESG ratings could generate £500 million in net benefits over the next decade by reducing the due diligence costs that asset managers currently bear when comparing divergent ratings methodologies.
The proposals appear to have broad industry backing: 95% of respondents to a government survey supported bringing ESG ratings under regulatory oversight.
Andy Ford, head of responsible investment at St. James’s Place, said regulation was a welcome step but cautioned against assuming it will resolve every challenge in the market. “ESG ratings can differ between providers because methodologies differ,” he said. “Investment managers shouldn’t be overly reliant on third-party ratings. These should be one input among many, compared with in-house analysis rather than outsourced judgement.”
The consultation is open until March next year, with final rules expected towards the end of 2026.
