Following the development of legislation expanding its jurisdiction to oversee ESG ratings providers, the U.K.’s Financial Conduct Authority (FCA) said it will be proposing rules in this area — boosting the fight against greenwashing, and enhancing transparency around ratings.
With the latest legislative reforms, the provision of environmental, social and governance (ESG) ratings will be brought under the existing securities legislation, and will require rating providers to be registered and supervised by the FCA.
“ESG ratings are widely relied upon by investors to guide investment decisions in line with sustainability risks, opportunities and preferences,” the U.K. government said in a memo outlining the measures.
“The market has developed quickly and without formal oversight, leading to stakeholders and users raising concerns about transparency, governance arrangements, internal controls, and potential conflicts of interest within ESG ratings providers,” the government said. It noted that global policymakers, including the International Organisation of Securities Commissions (IOSCO), have called for greater regulatory oversight, as a result.
The FCA said that these ratings are increasingly important to investors’ decisions and capital allocation — and that proposals to regulate ESG rating providers are supported by the industry.
“The intention is to enhance the integrity of the market by fostering robust governance, effective management of conflicts of interest, and sound systems and controls, while also advancing transparency. This will boost investor confidence and reduce greenwashing, addressing concerns highlighted in responses to the consultation, which overwhelmingly favoured regulation,” the government said.
Now, as the government has finalized its legislation, the FCA said that it will consult on proposed rules by the end of the year, which will focus on transparency, governance, systems and controls, and conflicts of interest.
The regulator will also be providing guidance to help the industry assess whether their activities fall under the new regime.
“This is an opportunity to raise the bar for transparency and trust, while ensuring the market remains competitive and resilient,” the FCA said.