Cleared for rating: FCA sets out plan to regulate ESG rating providers

The UK’s Financial Conduct Authority has published its proposed approach to ESG ratings regulation. FCA-authorised ESG ratings will come into effect in June 2028.

The proposal sets out new requirements for ratings providers across four focus areas – transparency, systems and controls, governance and conflicts of interest. The requirements apply to a broad range of ratings processes including product design, data collection, quality control and monitoring and review.

“Our proposals will give those who use ESG ratings greater trust and confidence – supporting our goal of increasing trust and transparency in sustainable finance”, commented Sacha Sadan, the FCA’s director of sustainable finance.

Today’s proposal builds on Treasury legislation, announced in October this year, that provides FCA with the powers to regulate the ESG ratings market.

The FCA had welcomed the move to bring ratings providers under its purview, acknowledging that doing so requires the regulator to find the balance between market competition and raising the bar on transparency.

Responsive

Demand for ESG data has risen, with global ESG data spending estimated to be $2.2 bn this year. The FCA’s rules, builds on a survey it conducted to investigate what the key concerns with ESG ratings were.

55% of respondents reported concerns with methodologies while 48% called for more transparency. The FCA says new rules will aim to address these concerns.

UK Sustainable Investment and Finance Association (UKSIF), whose members use ESG ratings and collectively manage £19tn, has welcomed the proposals.

“We particularly welcome the emphasis on transparency and consistency with international standards in the consultation paper – in line with previous International Organisation of Securities Commissions (IOSCO) recommendations”, says James Alexander, UKSIF’s chief executive.

Alexander says ESG ratings are increasingly shaping investment decisions, making the FCA rules timely and investor relevant.

“It is vital that investors and other market participants have full confidence in ESG ratings and their main objectives, given their growing role in shaping capital allocation decisions in the economy”, he adds.

MainStreet Partners, an investment adviser and ESG data provider says the FCA’s extended timeline will help the industry adapt and prepare. “We also view the extended timeline positively. The phased approach allows the industry to prepare effectively, while aligning with international developments”, says Sophie Meatyard, head of fund research at MainStreet Partners.

The timeline means the UK’s regime will follow the EU’s ESG ratings regulation which will take effect in July 2026.

“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”, Meatyard adds.

Conflict of interest

One of the FCA’s key areas of focus is the concern with conflicts of interest leading to biases in ratings. For instance, its consultation paper highlights the risk that charging structures – where investors or issuers pay for ratings – incentivise the ratings provider to issue a higher rating to ‘secure more business’.

The FCA’s research note, also published today, shows that this is a prevalent market concern. Over a quarter of the FCA’s survey respondents said they were concerned conflicts of interests could affect ESG ratings.

In the credit ratings market, the regulatory attention to this concern picked up in the aftermath of the 2008 financial crisis. At the time, the ‘issuer pays’ model of the credit ratings market had been widely criticised for fostering a conflict of interest.

In its final report, the bipartisan US Financial Crisis Enquiry Commission found that conflicts of interest in ratings markets had played a definitive role. “We conclude the failures of credit rating agencies were essential cogs in the wheel of financial destruction”, the Commission warned.

In identifying and mitigating conflicts of interest in the ESG ratings market, the FCA has both precedent and incentive.

“Ratings should be backed by strong governance and be completely free from unmanaged conflicts-of-interest. If this is achieved, decision-makers in the industry will have better visibility over sustainability issues and are set up for a more successful transition”, commented Mike Zehetmayr, EY’s EMEIA financial services risk, compliance and regulatory technology leader.

While the legislation for FCA-authorised ESG ratings is debated by Parliament, the FCA’s consultation is open for feedback until 31 March 2026. The FCA will then respond to the feedback and a final set of rules are expected by Q4 2026.