ESG rating agencies are to be regulated by the UK

The UK government is set to introduce legislation to regulate ESG rating agencies, as announced by Chancellor of the Exchequer Rachel Reeves during a visit to Toronto. According to the Financial Times, the proposed bill, expected next year, aims to standardise the methods used by these agencies and enhance transparency around the criteria they employ to evaluate companies. This move seeks to minimise greenwashing risks and strengthen investor confidence in ESG ratings.

Reeves indicated that the Financial Conduct Authority (FCA) will detail the regulations in the forthcoming bill. The FCA has been working on a code of conduct for ESG rating providers since November 2022, assembling a working group with representatives from M&G, Moody’s, London Stock Exchange Group, and Slaughter and May.

In December 2022, the government launched a consultation on ESG ratings with the intention of bringing these rating providers under FCA oversight by the first quarter of 2023. The new regulations are expected to align with existing EU requirements to ease the reporting burden on businesses.

In June 2023, the European Commission introduced its own rules for ESG rating providers, mandating registration with the European Securities and Markets Authority (ESMA) and establishing clear guidelines to prevent conflicts of interest and greenwashing.

The upcoming UK bill is part of broader government efforts to enhance transparency, support the financial sector, and bolster investor trust in the country’s finance industry.