• Legislation grants the Financial Conduct Authority (FCA) powers to regulate ESG ratings providers, ensuring transparency and comparability.
• FCA to launch public consultation on detailed rules by year-end, aligned with IOSCO standards.
• Reform aims to strengthen the UK’s position as a global hub for sustainable finance.

London Sets Stage for ESG Ratings Oversight

The UK government has introduced legislation bringing Environmental, Social and Governance (ESG) ratings providers under the supervision of the Financial Conduct Authority (FCA), a move designed to bring order, reliability, and trust to a rapidly expanding segment of the sustainable finance market.

The reform—broadly backed by investors and industry participants—will give the FCA legal authority to oversee how ESG ratings are produced and marketed. This follows concerns that inconsistent methodologies and opaque scoring systems have allowed discrepancies across providers, complicating investors’ ability to compare sustainability performance across companies and funds.

Strengthening Trust and Market Integrity

ESG ratings have become critical inputs in global capital allocation, influencing investment decisions across sectors and asset classes. The FCA said the legislation “provides the necessary powers to regulate ESG ratings providers—an important step toward ensuring transparency, reliability, and comparability.”

The regulator emphasized that the framework would help investors and companies navigate an increasingly complex market. “This is an opportunity to raise the bar for transparency and trust, while ensuring the market remains competitive and resilient,” the FCA stated.

Consultation on the Way

With the legislation now before Parliament, the FCA plans to publish a consultation paper on its proposed rules before the end of 2025. These rules are expected to draw on recommendations from the International Organization of Securities Commissions (IOSCO), which has outlined global best practices for ESG data and ratings oversight.

The FCA’s draft regime will focus on four pillars: transparency in methodologies, robust governance structures, sound systems and controls, and management of conflicts of interest. The regulator will also issue guidance to help firms determine whether their activities fall within the scope of regulation and whether they need FCA authorisation.

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Industry Impact and Alignment with Global Standards

The move aligns the UK with regulatory developments in the European Union, Japan, and Singapore, where authorities are also moving to formalize oversight of ESG ratings. For institutional investors and asset managers, consistent regulation across jurisdictions could simplify compliance and improve the quality of sustainability data feeding into investment models.

Financial institutions have long warned that divergent methodologies risked distorting capital flows meant to support the transition to a low-carbon economy. By imposing baseline standards, the FCA aims to ensure that ratings reflect credible, comparable data—mitigating greenwashing risks and enhancing investor confidence.

Supporting the UK’s Sustainable Finance Ambitions

The FCA described the reform as central to bolstering the UK’s role as a global sustainable finance hub. By embedding transparency and accountability in ESG data services, the new regime is intended to attract long-term green investment while safeguarding market integrity.

The regulator also stressed that oversight would be “proportionate and innovation-friendly,” balancing investor protection with the need to foster growth in sustainability-linked financial services.

Global Relevance

The UK’s decision comes amid growing international scrutiny of ESG data quality and methodologies. As more jurisdictions move to standardize the space, London’s approach could serve as a template for other markets seeking to regulate without stifling innovation.

For C-suite leaders, investors, and policymakers, the legislation represents more than a domestic policy shift—it signals a recalibration of the global ESG infrastructure. With the FCA set to unveil its detailed consultation later this year, market participants are preparing for a new era of accountability and comparability in sustainable finance.

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