The UK’s Financial Conduct Authority (FCA) has said it will launch a consultation on planned rules for ESG ratings by the end of the year.
It comes as the government this week finalised legislation allowing the FCA to supervise ESG ratings providers, in a bid to increase transparency and scrutiny on the industry.
While credit ratings and their providers are heavily regulated across Europe and the UK, their ESG equivalents sit largely outside of any supervision.
In 2021, global securities regulator body IOSCO called for more oversight of the space.
In response to this week’s legislative update, the FCA said: “We welcome the government’s legislation to bring ESG ratings providers into our remit. This marks a significant milestone in the UK’s commitment to enhancing transparency and trust in this market.
“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.”
It added that it has been busy developing a regime for ESG ratings, and plans to consult on its proposed rules “before the end of the year”.
The proposals will focus on four key areas: transparency, governance, systems and controls, and conflicts of interest.
“We will also be producing guidance to help firms assess whether their activities will fall under regulation and require our authorisation,” confirmed the FCA.
ESMA warning on ESG ratings in climate funds
Meanwhile, in the EU, the European Securities and Markets Authority (ESMA) warned last week of a lack of transparency around how ESG ratings were used in some climate transition funds.
In analysis of emerging trends in transition fund strategies, the supervisor noted that “positive screening appears to rely on the use of ESG ratings, but the role of those ratings is not always clear, due to limited disclosures by fund managers on the products used or the underlying data and methodologies”.
It found that nearly half the climate transition funds it assessed used external ESG ratings and scores to help select stocks, but – out of those – just 18% disclosed the exact products they use.
“And in most cases, the rating products mentioned do not appear to rate transition readiness,” said ESMA.
It added that the findings of its analysis “may help inform supervisory expectations about how fund managers define and implement their climate transition investment strategies”.
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