FCA unveils sweeping plan to regulate ESG ratings by 2028
ESG ratings will become a regulated activity under the Financial Conduct Authority (FCA) from June 2028 if new proposals are approved, with ratings providers required to publish minimum disclosures about methodologies, data sources, conflicts of interest and objectives.
In the FCA’s consultation paper CP25/34 – Proposed Regulation of ESG Ratings Providers, published today, a major new regulatory regime has been set out for ESG ratings providers aimed at providing increased transparency, strengthened governance and conflict-management rules.
See also: ESG ratings step closer to falling under FCA scope
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.
In its research for the consultation paper, the FCA found that 48% of those who use ESG ratings were concerned about transparency, while 55 cited weaknesses in ESG rating providers’ systems and controls. 40% were worried about inadequate governance arrangements to deliver independent, reliable ESG ratings and 26% were concerned potential conflicts of interest could impact ratings.
“We want to make ESG ratings more transparent, reliable and understandable.” the regulator said in the paper. “We want ratings users to better understand why ratings may vary between providers so they can make more confident decisions. We want rated entities to better understand how they are assessed and be able to engage more effectively with rating providers. This will increase trust and confidence in the market. It will also foster innovation and competition based on quality.”
The proposed rules for ratings providers include:
• Transparency: Minimum disclosure requirements for methodologies, data sources and objectives, so users better understand the ratings and rated entities understand how they are assessed. All disclosures must be “easily accessible, prominent, clear, fair and not misleading”, according to the proposals, and free of charge to relevant stakeholders.
• Systems and controls: Requirements for robust arrangements to ensure the integrity of the ratings process, including quality control, data validation and methodology reviews. Providers will also be expected to notify users and rated entities in advance of “material changes” to methodologies.
• Governance: Requirements to maintain operational responsibility over the ratings process, including any outsourcing, to ensure appropriate oversight and compliance with the regime.
• Conflicts of interest: Requirements to identify, prevent, manage, and disclose conflicts of interest at the organisational and personnel level, to maintain the ratings’ independence and integrity. Conflict could arise from charging models, consulting or advisory relationships or remuneration structures. If firms are not “reasonably confident” that mitigation measures will prevent damage to a rating’s independence, they must make public disclosures outlining the nature of the conflict.
• Stakeholder engagement: Requirements to provide rated entities with the opportunity to correct factual errors, procedures to allow other stakeholders to provide feedback and a fair complaints-handling procedure.
All disclosures must be “easily accessible, prominent, clear, fair and not misleading”, according to the proposals, and free of charge to relevant stakeholders.
ESG ratings providers will also need to adhere to FCA rules such as the Principles for Burnishes (PRIN), Senior Managers and Certification Regime (SM&CR) as core firms, and market abuse requirements for data integrity. However, the FCA said it does not intend to extend the Financial Ombudsman Service or Financial Services Compensation Scheme to cover ESG ratings.
Sacha Sadan, director of sustainable finance at the FCA, commented: “Our proposals will give those who use ESG ratings greater trust and confidence – supporting our goal of increasing trust and transparency in sustainable finance.
“This will enhance the UK’s reputation as a global sustainable finance hub – attracting investment and supporting growth and innovation.”
The FCA is inviting industry feedback to be sent to to CP25-34@fca.org.uk by 31 March 2026.
If approved, ESG ratings providers will be invited to seek FCA authorisation from June 2027, and will be required to be FCA approved by June 2028.
Reacting to the announcement, the Investment Association’s head of sustainability and responsible investment Carol Thomas said: a key requirement of forming sustainable and responsible investment strategies is access to high-quality sustainability-related data and ratings.
“ESG data and ratings providers therefore play an essential role in providing information and services that impact on investment decisions,” she said.
“As such, we welcome the consultation and hope to see a proportionate approach to regulating ESG ratings providers, one which does not impede the growth and evolution of sustainable and responsible investment.
“We look forward to working with our members and the FCA to ensure the new regulatory framework serves the needs of investors and the market as a whole and provides the flexibility for the asset management industry to continue to innovate and meet the demands of clients.”
‘Transparency and consistency’
Reacting to the announcement, the Investment Association’s head of sustainability and responsible investment Carol Thomas said: “A key requirement of forming sustainable and responsible investment strategies is access to high-quality sustainability-related data and ratings.
“ESG data and ratings providers therefore play an essential role in providing information and services that impact on investment decisions,” she said.
“As such, we welcome the consultation and hope to see a proportionate approach to regulating ESG ratings providers, one which does not impede the growth and evolution of sustainable and responsible investment.
“We look forward to working with our members and the FCA to ensure the new regulatory framework serves the needs of investors and the market as a whole and provides the flexibility for the asset management industry to continue to innovate and meet the demands of clients.”
Meanwhile, Julia Dreblow, founder of SRI Services and Fund EcoMarket, told Portfolio Adviser she would welcome rules that make ratings ‘crystal clear’ to users: “I have been concerned that ESG ratings have been a significant contributor to greenwash and the erosion of client trust for some years. This is not because I thought they were intentionally misleading, but because of their opacity. I feared they were being used to power asset selection and strategies that clients did not understand and were often uncomfortable with once they lifted the lid.
“I do not want future regulation to dampen ratings providers’ enthusiasm for this area, as assessing ESG attributes is important, and I don’t think looking for perfect alignment of data would be sensible either – as the real world is complex, fast moving and opinions always vary. Instead, I would like to see rules that focus on making ratings crystal clear to their users, intermediaries and end investors, building on SDR’s anti-greenwash, naming and marketing rules so that all everyone involved can make well informed decisions.”
Paris Jordan, head of respsonsible investing at Charles Stanley, added: “ESG ratings and research remain a useful tool for investment professionals to use within their own fundamental research, just as other sell side research can be a useful too. However, ratings are complex and a summation of analyst opinions/views/proprietary methodology and thus should be understood as such. Retail clients should understand that they are aggregations of views around risk management and are unlike credit ratings; therefore, I would argue they are more suited for investment professionals rather than end clients, unless the clients are sufficiently informed on the ratings process and what the rating itself means”
James Alexander, UKSIF CEO, said the trade body is “encouraged” to see the FCA’s proposals to regulate ESG ratings providers.
“We particularly welcome the emphasis on transparency and consistency with international standards in the consultation paper – in line with previous International Organisation of Securities Commissions (IOSCO) recommendations.
“It is vital that investors and other market participants have full confidence in ESG ratings and their main objectives, given their growing role in shaping capital allocation decisions in the economy.
“We look forward to engaging with the details of the consultation paper and further assessing the scope of the rules with our members, which may require some thought and clarification.”
Mike Zehetmayr, EY EMEIA Financial Services’ risk, compliance and regulatory technology leader, commented: “Today’s FCA proposals support more transparent and reliable ESG ratings for financial services firms, and if implemented effectively, will reinforce the UK’s position as a global sustainable finance hub by unlocking capital for the transition.
“Robust ratings are critical to the credibility of markets, and to achieving the transition. In carbon markets today, inconsistent data and opaque scoring models create confusion and risk, slowing the flow of capital into projects that deliver real climate impact. Without trusted ratings, the £1.3 trillion annual climate investment science demands are at risk of stalling.
“Aligned to the four focus areas announced today by the regulator, a useful rating must be transparent, built on clear methodologies, and formed of readily accessible data. Ratings should be backed by strong governance, and be completely free from unmanaged conflicts-of-interest. If this is achieved, decision-makers in the industry will have better visibility over sustainability issues and are set up for a more successful transition.”
Sophie Meatyard, head of fund research at ESG, sustainability and impact data provider MainStreet Partners, said the proposals are a “significant step toward improving transparency, consistency, and trust in the ESG ratings market, which plays a critical role in guiding sustainable investment decisions”.
“We are confident in the robustness of our methodologies and governance frameworks, and we see this regulation as an opportunity to demonstrate our commitment to integrity and comparability.
“We also view the extended timeline positively. The phased approach allows the industry to prepare effectively, while aligning with international developments. In particular, the European Union’s ESG Ratings Regulation will come into force in July 2026, and we hope that the UK and EU regimes will converge on key principles such as transparency, governance, and conflict management. Such alignment would reduce complexity for global investors and foster a more coherent sustainable finance ecosystem.
“These initiatives raise the bar for accountability and help ensure ESG ratings remain a trusted tool for capital allocation and corporate strategy.”
This article first appeared on Portfolio Adviser