The UK is moving to formally regulate the ESG ratings industry, marking a significant step in the evolution of sustainable finance oversight.

The Financial Conduct Authority (FCA) has released detailed proposals to bring ESG rating providers within its regulatory perimeter, following draft legislation by HM Treasury. The move responds to growing concerns from investors, asset managers, corporates and policymakers about inconsistencies, opaque methodologies and unmanaged conflicts of interest in a rapidly expanding market.

ESG ratings are increasingly influencing capital allocation, portfolio construction, risk management, stewardship decisions, and regulatory disclosures. However, the market has developed faster than regulatory oversight, creating trust gaps that the FCA now seeks to address.

The regulator estimates that the proposed regime could deliver approximately £500 million in net economic benefits over the next decade, driven by improved transparency, reduced risk and more efficient decision-making across the investment chain.

Sacha Sadan, the FCA’s Director of Sustainable Finance, said the proposals aim to restore confidence in ESG data: “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.”

Why the FCA Is Acting Now?

Global spending on ESG data, including ratings, is projected to reach $2.2 billion in 2025, underscoring how deeply ESG metrics are embedded in modern financial markets.

At the same time, the FCA’s research highlights persistent unease among users:

i. 55% of users are concerned about how ESG ratings are constructed

ii. 48% question the transparency of rating methodologies

With ESG ratings carrying growing commercial and regulatory significance, the FCA argues that proportionate oversight is now essential to maintain market confidence and protect the integrity of sustainable finance.

The Proposed Framework: Four Pillars of Oversight

The FCA’s consultation sets out a framework focused on clarity, accountability and trust, structured around four core areas:

1. Increased Transparency

ESG rating providers would be required to disclose clearer information on methodologies, data sources, assumptions and limitations. This is intended to:

- Enable more meaningful comparison between ratings

- Improve understanding for both users and rated entities

- Reduce disputes arising from opaque scoring approaches

2. Stronger Governance and Controls

Providers would need robust governance arrangements, documented decision-making processes, and effective systems to ensure consistency, quality assurance and methodological discipline across rating activities.

3. Conflicts of Interest Management

Given that many providers offer adjacent advisory or data services, the FCA proposes bespoke rules requiring firms to identify, manage and where appropriate, disclose conflicts of interest that could influence ratings outcomes.

4. Stakeholder Engagement and Complaints Handling

Firms would be expected to establish clear channels for stakeholder engagement and transparent complaint-handling mechanisms. The FCA believes structured engagement will strengthen credibility and reduce friction across markets.

Importantly, the regulator emphasises that requirements will be proportionate, calibrated to the size, risk profile, and business model of each provider, ensuring smaller firms are not unduly burdened.

How the Regime Will Be Implemented?

The FCA proposes to regulate ESG rating providers by applying core UK financial-services standards, supplemented by targeted rules specific to ESG ratings.

1) Core conduct and accountability standards

ESG rating providers would be subject to the FCA’s Principles for Businesses, requiring firms to act with integrity, exercise due skill and care, manage risks effectively and communicate clearly with market participants. While the Consumer Duty will not apply, these principles establish baseline expectations for responsible conduct and credible ratings production.

2) Stronger governance, systems, and internal controls

Firms would need robust governance frameworks covering methodology design, data quality, quality assurance, record-keeping and risk management. The objective is to ensure ratings are produced through consistent, well-controlled processes rather than opaque or ad-hoc approaches.

3) Clear senior accountability under SM&CR

Senior managers would be individually accountable for key functions and decisions under the Senior Managers & Certification Regime. This strengthens oversight at the leadership level and reduces governance risk, including for overseas providers operating through UK branches.

4) Targeted ESG-specific rules

Recognising the unique risks in the ESG ratings market, the FCA proposes bespoke requirements focused on:

i. Transparent disclosure of methodologies, data sources, assumptions and limitations

ii. Identification and management of conflicts of interest, particularly where firms offer adjacent services

iii. Structured stakeholder engagement and effective complaints-handling processes

All requirements will be applied on a proportionate basis, calibrated to firm size, business model, and risk profile, to preserve competition and innovation while strengthening market trust.

What C-Suite Leaders and Investors Should Watch

If implemented, the regime will place the UK among the first major jurisdictions to explicitly regulate ESG ratings, creating a reference point for other markets considering similar steps.

For corporates, clearer methodologies could reshape how sustainability strategies are externally assessed, with implications for investor engagement, cost of capital, and competitive positioning.

For asset managers and investors, a regulated landscape may reduce operational risk and improve confidence in ESG inputs, though it could also prompt shifts in provider selection and stewardship practices.

Private-sector executives should also anticipate potential changes to regulatory reporting workflows as transparency requirements reshape the data inputs used by rating agencies.

The Bigger Picture

As ESG data becomes part of the financial system’s core infrastructure, regulators are converging around the need for standards that balance innovation with integrity.

The UK’s move reflects a broader global shift: sustainable finance is no longer driven solely by voluntary practices, but increasingly shaped by formal regulatory frameworks. How ESG ratings are governed today will influence not only investment decisions, but also how sustainability performance is judged across borders in the years ahead.