In an effort to improve transparency and confidence in ESG ratings, the U.K. government is moving ahead with plans to regulate ESG ratings providers.
In early 2023, the previous U.K. government launched a consultation on whether to start regulating the ratings providers, given the rising demand for ESG investments, along with growing concerns about greenwashing and the lack of standards in the provision of ESG ratings.
In the wake of that consultation, the current government declared its intention to move forward with regulation in a paper published Thursday. The paper sets out the proposed scope of the planned regulatory regime, which aims to regulate ratings that are used by investors and impact capital allocation decisions, and translates the government’s plans into draft legislation.
“Bringing ESG ratings providers into regulation will boost investor confidence, reduce greenwashing, and address the lack of transparency highlighted in responses to the government’s consultation,” said Tulip Siddiq, an MP and Economic Secretary to the Treasury and City Minister, in the paper.
“This will help to drive investment, support innovation and ensure that companies in critical sectors are not penalized by opaque ratings,” she added.
In a statement, the U.K.’s Financial Conduct Authority (FCA) said it welcomed the move, which it noted is “widely supported by industry.”
“As financial services firms integrate ESG into their activities and expand their products in this space, they are increasingly reliant on third party ESG data and ratings services,” the regulator said. “We have previously said we support bringing ESG ratings providers into regulation, to improve transparency and trust in the market.”
The draft legislation is out for comment until Jan. 14, 2025.
Once the legislation is finalized next year, the FCA said it will consult on proposals for the future regulatory regime too.
“We support a globally consistent approach that enables users to make better informed investment decisions and gives the market confidence in the reliability and quality of these products,” the FCA said.
The regulator added that its regime will adhere to the International Organization of Securities Commission’s (IOSCO) recommendations in this area, “which focus on transparency, good governance, managing conflicts of interest, and proper systems and controls.”
In the meantime, the FCA said it continues to encourage ESG data and ratings providers to join the industry-led code of conduct, which is also based on the IOSCO recommendations.