The UK’s Financial Conduct Authority (FCA) has attracted broad industry support for its plans to regulate ESG ratings providers, though respondents have warned the rules must remain workable in practice.
It follows a consultation that closed on 31 March and comes after legislation enabling the FCA to supervise ESG ratings providers for the first time, in a bid to increase transparency and scrutiny across the industry.
Norges Bank Investment Management (NBIM) said the proposals should “enhance transparency, reliability, and integrity in ESG ratings”, while supporting the “well-functioning of financial markets”.
While credit ratings and their providers are heavily regulated across Europe and the UK, their ESG equivalents sit largely outside of formal supervision. In 2021, the global securities regulator IOSCO called for greater oversight of the space.
Recent research by the International Capital Market Association (ICMA) pointed to the growing use of ESG ratings and data products across asset classes, while noting continued scrutiny of methodologies and their application despite improvements in transparency driven by voluntary codes.
Under the FCA’s proposals, providers would be required to seek authorisation, with rules expected to focus on transparency, governance, systems and controls, and conflicts of interest. The regulator is expected to finalise its rules later this year.
NBIM also supported greater transparency around methodologies and data inputs, but cautioned against an overly prescriptive regime. It said the diversity of ESG assessments available to investors is a feature of the market, warning that rigid rules could undermine that.
The International Capital Market Association pointed to the cross-border nature of the industry, noting that diverging national frameworks risk creating duplication and fragmentation for providers and users.
The Investment Association said access to high-quality sustainability data is essential for investment decision-making and called for careful calibration to avoid placing disproportionate burdens on smaller providers. It also called for greater clarity on scope.
The UK Sustainable Investment and Finance Association (UKSIF) backed the FCA’s direction but said disclosure requirements must remain decision-useful for investors, citing ongoing data availability challenges.
The Society of Pension Professionals (SPP) welcomed the proposals but pointed to practical challenges around access to underlying ESG data, legal considerations and the potential impact on smaller participants.
Amanda Cooke, chair of the SPP’s Financial Services Regulation Committee, said improved disclosures on methodologies, fees and conflicts would strengthen trust and comparability. “Implementation must be practical, especially for smaller providers,” she said, adding that terms such as “material changes” need a clearer definition to avoid unnecessary cost and confusion.
Meanwhile, in the EU, the European Securities and Markets Authority (ESMA) has previously warned of limited transparency around how ESG ratings are used in investment strategies, highlighting the role of disclosure in improving market understanding.
