The UK government has announced plans to regulate ESG ratings providers as part of its strategy to enhance transparency and maintain robust oversight in the rapidly expanding sustainable finance sector.
According to ESG News, this regulatory push is designed to position the UK as a leader in sustainable finance globally, with the ESG market expected to exceed $40trn by 2030.
Economic Secretary to the Treasury & City Minister Tulip Siddiq MP highlighted the dual benefits of this initiative, stating, “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.”
A summary of the government’s findings reveals that an overwhelming 95% of stakeholders from 94 consultation responses support the regulatory measures. These proponents argue that regulation is crucial for enhancing transparency and reducing conflicts of interest, aligning ESG practices with international standards like those of the International Organisation of Securities Commissions (IOSCO).
However, concerns remain among 22% of the stakeholders regarding the potentially stifling effect of strict transparency rules on innovation, especially for smaller providers. They fear that the increased financial burden of compliance might be transferred to consumers.
Looking into the specifics of the proposed regulation, the government has suggested excluding certain ESG ratings activities such as those produced for internal use, consulting services, and outputs related to academia or journalism. A significant majority of respondents supported these exclusions, recognizing the bespoke nature of consulting services and the unique use of internal ratings.
Siddiq further explained the intended regulatory framework: “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.” The legislation, expected to be introduced in early 2025, will cover all ESG ratings that could influence investment decisions on specified financial products, including those offered by UK-based and overseas providers to UK users.
The government also outlined plans for aligning the UK’s regulatory framework with international measures, such as the EU’s Sustainable Finance Disclosure Regulations (SFDR) and the ISSB standards, to avoid market fragmentation. This alignment is crucial as the full regulatory framework is anticipated to be operational within four years, with the Financial Conduct Authority (FCA) playing a key role in the development of specific rules and guidance.
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