• Regulatory Initiative: The UK government is introducing regulation for ESG ratings providers to ensure transparency and reduce conflicts of interest, aligning with IOSCO’s 2021 recommendations.
• Industry Support: 95% of consultation respondents backed regulation, highlighting the need for clear methodologies and transparency, while smaller firms voiced concerns about potential cost burdens.
• Timeline and Scope: Legislation is set for early 2025, with full implementation expected within four years, encompassing both UK-based and overseas providers engaging with UK users.

The UK government has taken a significant step to regulate Environmental, Social, and Governance (ESG) ratings providers, aiming to bolster transparency and ensure robust oversight in a market set to surpass $40 trillion by 2030. This move aligns with the government’s mission to secure the UK’s position as a global leader in sustainable finance and promote economic growth through better-regulated ESG practices.

Tulip Siddiq MP, Economic Secretary to the Treasury & City Minister, emphasized, “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.”

Key Findings:

• Strong Support for Regulation: Out of 94 consultation responses, 95% endorsed the introduction of regulation, citing the need for transparency and a reduction of conflicts of interest. These respondents highlighted the importance of aligning with international standards set by the International Organisation of Securities Commissions (IOSCO).
• Concerns Raised: While most stakeholders favored regulation, 22% noted that stringent transparency rules could stifle innovation, disproportionately affecting smaller providers. Additionally, the potential financial impact of compliance was a key concern, with costs potentially being passed down to users.
• Implementation Challenges: Respondents stressed the importance of defining the scope clearly to avoid unnecessary operational or financial burdens and ensure that smaller players are not disproportionately affected.

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Detailed Insights:

• Exclusions Considered: The government proposed exclusions for specific activities, including ESG ratings produced for internal use, consulting services, and academic or journalistic outputs. Notably, 79% of respondents supported excluding internal ratings used solely within an organization, while 70% agreed on excluding consulting services due to their bespoke nature.
• Regulatory Framework: The upcoming regulation will cover all ESG ratings likely to influence investment decisions on specified financial products. This includes ratings from both UK-based and overseas providers when made available to UK users through business relationships.
• Scope Clarifications: The government clarified that ESG ratings would be defined as assessments that include opinions or scores on one or more ESG factors. These definitions will apply whether or not the product is explicitly labeled as an “ESG rating.”

Government Response: The government has confirmed that it will proceed with the planned regulation and draft legislation, with feedback open until early 2025. This legislation will define the regulatory perimeter and exclusions to balance oversight with maintaining a competitive market. Siddiq remarked, “This consultation response sets out the government’s policy approach to the regulation of ESG ratings and how that approach has been included in draft legislation.”

Global Alignment and Future Steps:

• International Consistency: Recognizing the need for global coherence, the UK’s regulatory approach will align with international frameworks, such as the EU’s Sustainable Finance Disclosure Regulations (SFDR) and the ISSB standards, to prevent market fragmentation.
• Implementation Timeline: The legislation is set to be introduced in early 2025, with the full regulatory framework expected to be operational within four years. The FCA will oversee the development and consultation of specific rules and guidance, ensuring alignment with international standards and thorough cost-benefit analysis.

Broader Observations:

• Voluntary Codes: While regulation was favored, some respondents emphasized the value of a complementary voluntary code of conduct for flexibility.
• Potential Overlaps: Stakeholders raised the issue of possible regulatory overlaps with existing measures like the FCA’s anti-greenwashing rules. The government aims to address these through careful coordination.

The UK government is setting the stage for a robust, transparent, and competitive ESG ratings sector, poised to support investment growth while ensuring accountability and consistency. As Siddiq noted, this initiative will place the UK “at the forefront of this crucial, growing market.”

Read the Full Future regulatory regime for ESG ratings providers document

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