Recently, we wrote about the UK Government’s proposed legislation allowing the Financial Conduct Authority (FCA) to regulate ESG ratings. The FCA has now reached a major milestone towards promulgating ESG ratings regulations. Earlier this week, the agency released a consultation paper outlining its planned regulatory approach. An FCA press release outlines the main pillars of their proposal:
“The FCA’s research shows around half of those who use ESG ratings are worried about how they are built (55%) and how transparent they are (48%). The proposals aim to address this and focus on 4 areas:
- Increased transparency – allowing easier comparisons for the benefit of both those who use ratings and those who are rated.
- Improved governance, systems and controls – to ensure clear decision-making and strong oversight and quality assurance.
- Identification and management of conflicts of interest.
- Setting clear expectations for stakeholder engagement and complaints handling.
There are also proposals on applying existing FCA rules to firms coming into the FCA’s remit. The proposed rules are designed to be proportionate to business size and risk.”
The FCA’s consultation is open until March 31, 2026. The agency expects to issue final rules in Q4 2026, with obligations coming into force on June 29, 2028. ESG ratings have been the subject of scrutiny for years. Many argue that the opaque nature of ratings formulas and possible self-dealing by raters undermine the credibility of ESG ratings. Regulations like those proposed in the UK are designed to strengthen investor confidence in ratings and increase rating accuracy.
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