The FCA will regulate ESG ratings providers

Monday 01 December 2025 13.50

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Environmental, Social and Governance (ESG) ratings providers will be supervised by the Financial Conduct Authority (FCA) under plans published by the watchdog citing concerns over conflicts of interest and lack of transparency in the growing industry.

In what is the most radical overhaul of sustainable finance regulations in UK history, the city’s top regulatory body has launched a formal consultation to bring the agencies that provide ESG ratings under its remit.

These bodies assess the performance of companies and funds based on various environmental and social inclusion criteria. As more and more large funds incorporate ESG into their investment strategies, the rating agency industry, which tends to charge fees to portfolio companies and investors, has grown to around $2.2 billion (£1.6 billion) globally.

Transparency matters

However, their rapid growth comes with concerns about a lack of transparency and consistency across service providers, with many using different and often unclear methodologies for conducting assessments.

The FCA is also concerned about the extent of conflicts of interest in the sector. Some agencies also have relationships with ESG consulting services with client bases that overlap with the groups of companies for which they are responsible for rating.

Under the FCA’s proposals, ratings agencies would be required to share information about their methodologies and data sources with the regulator, as well as identify, manage and disclose any conflicts of interest.

“We are encouraged to see the FCA’s proposals to regulate ESG ratings providers,” said James Alexander, chief executive of the UK’s Association for Sustainable Investment and Finance.

“We particularly welcome the emphasis on transparency and consistency with international standards in the consultation paper – in line with previous recommendations of the International Organization of Securities Commissions (IOSCO).

The City is still trying to cut red tape

The decision to bring ESG ratings within the purview of these regulatory bodies comes despite broader efforts by central government to clamp down on excessive and overly burdensome regulation. Both the Chancellor and the Prime Minister have made deregulation central to their “mission number one” to kick-start hard-to-achieve economic growth.

At the end of last year, they wrote to the heads of Britain’s biggest regulatory bodies, asking for dozens of ideas on how to reduce excessive bureaucracy in the private sector and how to “manage growth”.

The FCA estimates the ESG proposals, which will now be open to a consultation process culminating in March next year, will generate net benefits of £500m over the next decade, thanks to reduced due diligence and compliance costs.

In a consultation paper published on Monday, the watchdog also said the move had the support of 95 percent of investors who responded to a government survey to assess industry demand.

Andy Ford, head of responsible investing at St. James’s Place, said: “This is a positive step. Much has been said about differences in ESG ratings between service providers, but this is often due to differences in the methodology used.”

“However, we should not overstate the impact of bringing rating agencies within regulatory constraints. In our view, investment managers should not rely too heavily on third-party ratings,” he added. “We prefer our managers use it as one input among many, comparing external assessments with their internal analysis rather than outsourcing assessments.”