ESG ratings step closer to falling under FCA scope

The UK government has taken the next step towards regulating ESG ratings providers, tabling secondary legislation that places them within the Financial Conduct Authority (FCA)’s scope.

Yesterday (27 October) the UK government drafted the Financial Services and Markets Act 2000 (Regulated Activities) (ESG Ratings) Order 2025 giving a commencement date of 29 June 2028.

This will be the first time ESG ratings will be subject to formal regulatory oversight. Any rating provider, overseas or UK-based, that is serving UK clients will fall under the remit unless they apply to the FCA for exclusions.

The move was first announced in the 2024 Spring Budget after the government published a consultation on the proposal. The consultation found ESG assets were predicted to grow to $33.9trn of global assets under management (AUM) and therefore the importance of reliable ESG information is “critical and growing”. It also noted the increasing reliance on unregulated ESG ratings, particularly in investment decisions, which can potentially raise investor risks.

Now the order has been drafted, it has opened the door for the FCA to consult on the proposed rules and regulations, which is likely to happen before the end of the year, according to James Alexander, CEO of the UK Sustainable Investment and Finance Association (UKSIF).

“We welcome the progression through parliament of legislation to bring ESG ratings providers within the regulatory perimeter of the FCA,” he added.

“It’s crucial for institutional and retail investors to have full confidence in ESG ratings, including their objectives, as these are increasingly utilised as an important tool to inform capital allocation decisions in the economy.

“We believe that greater transparency and high-quality, proportionate standards will bring benefits for both users and ratings providers, and look forward to the upcoming consultation from the regulator.”

“UKSIF will be engaging closely in this process, and we encourage members to share views with us as the consultation gets underway.”

This article first appeared on Portfolio Adviser