In an effort to improve the transparency, credibility and comparability of ESG ratings, the U.K.’s Financial Conduct Authority (FCA) is proposing a new regulatory framework to govern the provision of ESG data.
In a consultation paper issued Monday, the FCA set out a proposed approach to regulating ESG ratings that aims to address growing concerns about an increasingly important input for investors.
“ESG ratings inform investment decisions, risk management and regulatory reporting,” it said — noting that global spending on ESG data, including ratings, is projected to reach US$2.2 billion this year.
“Where the products are not reliable, this leads to potential harm in financial markets,” the FCA said.
In particular, the regulator reported that its research with users of this data raised concerns about transparency, conflicts of interest, the strength of rating providers’ systems and controls and their governance arrangements, among other things.
In response to these concerns, and amid strong support for regulation to address these issues, the FCA is introducing proposed rules that aim to improve the integrity of ESG ratings. It also details how its existing rules apply to ratings producers, as they come under its jurisdiction.
“We want ratings users to better understand why ratings may vary between providers so they can make more confident decisions. We want rated entities to better understand how they are assessed and be able to engage more effectively with rating providers,” the regulators said in its consultation paper.
“This will increase trust and confidence in the market. It will also foster innovation and competition based on quality,” it added.
The FCA said its proposals draw on the existing industry code of conduct, which is voluntary, and the policy recommendations of the International Organization of Securities Commissions (IOSCO) in this area.
“Our proposals will give those who use ESG ratings greater trust and confidence — supporting our goal of increasing trust and transparency in sustainable finance,” said Sacha Sadan, director of sustainable finance at the FCA, in a release.
The consultation is open until March 31, 2026.
The FCA is aiming to finalize its rules by the end of 2026, with the new regime taking effect in June 2028.