FCA to regulate providers of ESG ratings amid transparency and conflict concerns
The UK’s financial watchdog is preparing to bring environmental, social and governance (ESG) ratings under statutory law for the first time, in what has been described as the biggest shake-up of financial rules in the country.
The Financial Integrity Authority (FCA) has launched a demonstration to show plans to police the fast-growing ESG sector, which has grown into a global sector where managers will invest their strategies.
Rating agencies evaluate companies and funds on environmental impact, social responsibilities and governance standards. But the explosive growth of the sector has created persistent concerns about finding incompatible goals, opaque methods and potential conflicts of interest, especially when financial providers offer the same services as the same companies they are evaluating.
Under the FCA’s proposals, agencies will be required to disclose their methods and sources of data, identify and manage any disputes. The move follows warnings from investors and regulators around the world that Divergent Esgs are scoring goals that reduce the strength of stable finance.
James Alexander, Chief Investment Officer of Investments and Finance, welcomed the proposals. “We particularly welcome the emphasis on transparency and flexibility which are international standards,” he said, noting the alignment with earlier recommendations of the International Organization for Standardization (iOsco).
The government’s decision to go back to the FCA’s oversight despite the chancellor and the Prime Minister forcing the regulators to renew the Slash “in a bid to revive economic growth. Ministers wrote to the chief regulators last year seeking proposals to lighten the regulatory burden on businesses.
However, the FCA says that managing ESG ratings could generate $500 million in net benefits over the next ten years by reducing due diligence costs that asset managers currently incur.
These proposals appear to have industry-wide support: 95% of respondents to a government survey are set to bring ESG ratings under regulatory oversight.
Andy Ford, head of investment for the St James area, said the regulation was a welcome step but cautioned against thinking it would solve every challenge in the market. ESG ratings can vary between providers because the methods vary,” he said. “Fund managers should not over-rely on third-party ratings. This should be one input among many, compared to an in-house analysis rather than a judgement.”
Consultations are open until March next year, with final rules expected in late 2026.
