UK Enacts Legislation Bringing ESG Rating Providers Under FCA Regulation

The UK enacted legislation placing ESG ratings providers under statutory regulation by the Financial Conduct Authority, applying to firms producing ratings for UK investors. The move sets an international precedent for regulating ESG data, addressing methodology transparency and greenwashing concerns relevant to global rating providers.

The UK government enacted legislation bringing Environmental, Social, and Governance ratings providers under statutory regulation by the Financial Conduct Authority. Regulation applies to firms that both produce ratings and make them available to UK investors, covering UK-based and overseas providers serving UK customers. The rapidly expanding ESG ratings market had previously operated without formal regulatory oversight, raising concerns about methodology transparency and conflicts of interest. Global securities body IOSCO had recommended closer regulatory attention to this data sector.

Both UK-based and overseas ESG ratings providers serving UK customers are affected and must now seek official authorisation. The FCA confirmed it is developing a regulatory regime informed by IOSCO recommendations, concentrating on four pillars: enhanced transparency, robust governance, strong internal systems and controls, and management of conflicts of interest. The reform addresses risks of greenwashing from unregulated ratings, which undermine investor confidence, given that ratings increasingly influence global capital allocation decisions and sustainable investment growth.

Affected ratings providers should prepare for authorisation requirements and monitor the FCA's consultation paper detailing final rules, expected before the end of the calendar year. Firms should align with the four regulatory pillars covering transparency, governance, systems and controls, and conflicts of interest. Providers serving UK investors, including overseas firms, should assess their methodologies against IOSCO-informed standards as the UK positions itself as a leading international hub for transparent, reliable sustainable finance.

Key figure — Next step: FCA to publish a consultation paper on final rules before the end of the calendar year