FCA consultation for the regulation of ESG ratings

The FCA has published proposals to ensure that environmental, social and governance (ESG) ratings are transparent, reliable and comparable.

These proposals follow the decision by the government to bring ESG ratings within the FCA's remit.

What are ESG ratings?

ESG ratings measure a company's exposure to long-term environmental, social and governance issues, and are used by investors to inform investment decisions, risk management and regulatory reporting.

For a rating to be caught by the new regime, it will have to meet each of the following criteria:

• Does it come within the definition of ESG rating?
  • An ESG rating will be defined in the new legislation as "an assessment regarding one or more ESG factors, which:
    • (a) is produced in the form of an opinion, a score or a combination of both where:
      • (i) 'score's means a measure derived from data and a pre-established statistical or algorithmic system or model, without additional substantial analytical input from an analyst, and
      • (ii) 'opinion' means an assessment involving substantial analytical input from an analyst, and
    • (b) is prepared using an established methodology and a defined ranking system of rating categories
• Is the provider producing the rating?
  • The provider must both produce the rating and make it available. Mere distribution of someone else's rating does not apply.
• Is the rating likely to influence decision making?
  • The rating must be likely to influence a decision to make a specified investment.

A four-pillar framework

There have been ongoing concerns about the quality, transparency, independence and consistency of ESG ratings in the market. The FCA hopes that introducing clear, proportionate rules for transparency and governance will help to build the market's trust in ESG ratings and address these concerns. This will in turn benefit business and reinforce the UK's reputation as a global sustainable finance hub.

The proposed rules focus on four areas:

• Increased transparency: allowing easier comparisons for the benefit of both those who use ratings and those who are rated.
• Improved governance systems and controls – to ensure clear decision-making and strong oversight and quality assurance.
• Identification and management of conflicts of interest – clear expectations for identifying, preventing managing and disclosing conflicts of interest at the organisational and personal level, to maintain ratings' independence and integrity.
• Setting clear expectations for stakeholder engagement and complaints handling – rated entities will have the opportunity to correct factual errors, before and after the ESG ratings are issued.

The consultation is open until 31 March 2026. Final rules are expected in the final quarter of 2026, with the new regime coming into effect from June 2028. ESG ratings providers will be invited to seek FCA authorisation from June 2027.

Comment

Tom Kershaw commented "Sustainability performance continues to be important to investors as part of their long-term decision making. These proposals are welcomed and the focus on increased transparency which they should bring, will help investors better assess future risks and opportunities when making investment decisions.

Stakeholder engagement will be key to the success, and it is important that rated entities will be given the opportunity to correct factual errors both before and after ESG ratings are issued."