The Financial Conduct Authority (FCA) has today launched a consultation on rules for ESG ratings, although it said this did not absolve users of the need to carry out their own due diligence.
“The scope of regulation will be complex, so this may involve distinguishing between regulated and unregulated products,” it said. “We will monitor whether further guidance for firms on using ESG ratings will be useful.”
As trailed, the proposed rules focus on four areas: transparency; governance, systems and controls; conflicts of interest; and stakeholder engagement and complaints handling.
The regulator said that it is proposing targeted and more detailed rules to improve transparency – an area of “greater harm” – and proposing a more principles-based approach with regard to managing conflicts of interest and stakeholder engagement.
As concerns transparency, the proposed regime includes minimum public transparency requirements and additional disclosure requirements for direct users such as asset managers and asset owners.
The latter, for example, will not just get descriptions of methodologies, data sources and objectives, but information on methodology reviews, how any data is estimated, and a more detailed explanation of the sources of specific data points used in a rating.
The FCA said that, in general, it will expect rating providers to ensure disclosures are: “easily accessible, prominent and free to obtain for the relevant stakeholders; in a written format that is clear and easy to understand; accurate, fair, and not misleading; and shared as required and updated as soon as practicable.”
The proposed requirements relating to governance, systems and controls aim to reduce the risk of inaccurate and unreliable ratings leading to misinformed decision-making.
The FCA said it planned to require rating providers to review their methodologies periodically and notify users and companies or other rated entities of material changes before they come into effect.
Regarding stakeholder engagement, the FCA is proposing requirements to provide rated entities with the opportunity to correct any factual errors, and procedures to allow other stakeholders to provide feedback.
Sacha Sadan, director of sustainable finance at the FCA, said the regulator’s proposals would give ESG rating users “greater trust and confidence”.
“This will enhance the UK’s reputation as a global sustainable finance hub – attracting investment and supporting growth and innovation,” he added.
The FCA today claimed the proposals to regulate ESG rating providers would deliver around £500m (€570m) in net benefits over the next decade. It noted that 95% of respondents to a government consultation supported the government’s decision earlier this year to bring ESG ratings within the FCA’s remit.
The regime outlined today is deemed in line with international standards, including International Organisation of Securities Commissions recommendations and a voluntary industry-led code of conduct.
Final rules are expected in Q4 2026, with the new regime due to come into effect from June 2028. The FCA said it would provide support for those firms wishing to become authorised as an ESG rating provider.
Sophie Meatyard, head of fund research at MainStreet Partners, an ESG, sustainability and impact data provider, welcomed the extended timeline.
“The phased approach allows the industry to prepare effectively, while aligning with international developments,” she said.
“In particular, the European Union’s ESG Ratings Regulation will come into force in July 2026, and we hope that the UK and EU regimes will converge on key principles such as transparency, governance, and conflict management.
“Such alignment would reduce complexity for global investors and foster a more coherent sustainable finance ecosystem.”
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