UK govt launches ESG ratings consultation

December 14, 2022

ESG rating providers may soon be brought within the regulatory remit of the Financial Conduct Authority (FCA) by the UK government in the first quarter of 2023.

A consultation on regulating ESG ratings, and bringing them under the jurisdiction of the FCA, forms part of a package of reforms to the UK financial services regulation.

The proposed reforms will revise retained EU laws and establish a new green finance strategy for ESG ratings. 

Jeremy Hunt, UK chancellor of the exchequer, said: “The Government are ensuring that the financial system plays a major role in the delivery of the UK’s net-zero target and are acting to secure the UK as the best place in the world for responsible and sustainable investment.” 

To improve transparency and good market conduct of ESG rating providers, the UK Treasury will join the ESG data and ratings code of conduct working group as an observer.  

The group was assembled by the Financial Conduct Authority (FCA), which created the taskforce to help regulate ESG data and rating providers in November. 

The group aimed to establish a voluntary code of conduct to improve transparency and trust in the sustainability-products marketplace. 

The group is expected to continue developing the voluntary code of conduct, despite the possibility of formal regulation.  

The FCA has welcomed the proposal to regulate firms providing ratings.  

Sacha Sadan, head of the FCA’s ESG division, said: “We look forward to working closely with the government on the next steps, encouraging regulation that focuses on transparency, good governance, management of conflicts of interest, and robust systems and control.”  

Over the past decade, the financial services sector has experienced an explosion of rating providers.  

Mike Zehetmayr, financial service risk and compliance technology specialist for EY, reported that EY identified 100 ESG data and ratings providers, which was double the amount identified the year prior.   

However, the diversity of approaches and methods used by providers has led to confusion, leading to frequent calls for standardisation.