In a major step toward improving transparency and accountability in sustainable finance, the UK government has introduced legislation to bring Environmental, Social, and Governance (ESG) ratings providers under the supervision of the Financial Conduct Authority (FCA). The move establishes a formal regulatory regime for a sector that has grown rapidly in influence yet remained largely unregulated shaping trillions of pounds in global investment decisions without consistent standards or oversight. The legislation, presented in Parliament this week, represents a decisive policy shift that aligns the UK with growing international efforts to ensure the integrity and reliability of ESG ratings, which play an increasingly critical role in corporate sustainability assessments, capital allocation, and risk analysis.

Bringing Oversight to an Unregulated Corner of Finance

The new law follows several years of mounting scrutiny over the methodologies, data sources, and potential conflicts of interest in the ESG ratings industry. It comes three years after the International Organization of Securities Commissions (IOSCO) issued a call for regulators worldwide to introduce clear frameworks for ESG data and ratings oversight. IOSCO’s 2021 report urged regulators to enhance transparency, require disclosure of methodologies, and ensure that providers identify and manage conflicts of interest particularly where rating agencies also offer consultancy or advisory services to rated entities. Responding to those global recommendations, the UK first launched a public consultation in 2023, followed by draft legislation in 2024 under the current administration. The finalized version now mandates that any ESG ratings provider operating in the UK whether domestic or international must obtain FCA authorization before offering services in the market. This requirement ensures that both UK-based and foreign firms providing ESG assessments to UK investors will be subject to the same regulatory expectations.

READ MORE: Google and NextEra Join Forces to Revive Iowa Nuclear Plant to Power AI Growth with 24/7 Clean Energy

FCA to Develop a Comprehensive Regulatory Regime

In a statement welcoming the new legislation, the Financial Conduct Authority confirmed that it is already developing its regulatory framework, with proposed rules expected by the end of this year.

The FCA said its approach will be guided by IOSCO’s principles and structured around four central pillars:

Transparency – requiring providers to disclose their methodologies, data sources, and limitations.
Governance – ensuring sound organizational practices and accountability in the rating process.
Systems and Controls – mandating robust internal procedures to ensure data integrity and reliability.
Conflict of Interest Management – preventing situations where ratings providers also advise the companies they evaluate.

The FCA also plans to issue guidance documents to help firms determine whether their activities fall under the new regime and require authorization.

“ESG ratings continue to play a critical role in influencing investment and capital allocation decisions,” the FCA said in a statement. “This legislation provides us with the necessary powers to regulate ESG ratings providers, an important step towards ensuring that these ratings are transparent, reliable, and comparable.”

Industry Reaction and Global Context

The initiative has been broadly welcomed by investors, asset managers, and industry bodies, many of whom have long called for greater regulatory clarity in a sector that underpins sustainable investment products but often operates with opaque methodologies. Over the past decade, ESG ratings have become a cornerstone of green finance guiding decisions by institutional investors, pension funds, and banks. Yet discrepancies among providers’ methodologies have raised questions about consistency, comparability, and credibility. For example, two major rating agencies might assign sharply different ESG scores to the same company due to differing weighting systems or data sources, creating confusion for investors and undermining trust in the broader ESG ecosystem. The UK’s move puts it among a growing number of jurisdictions including the European Union, Japan, and Singapore that have begun to introduce regulatory oversight for ESG data providers.

Implementation Timeline and Market Impact

Under the new legislation, the regulation of ESG ratings providers will formally take effect in June 2028, giving the industry several years to prepare for compliance and transition under the FCA’s supervision. The phased timeline reflects both the complexity of the market and the regulator’s intent to balance innovation with accountability. ESG data and ratings providers will need to begin aligning their practices with the forthcoming FCA rules including the likely introduction of standardized disclosure templates and audit requirements. Analysts expect the regulatory shift to have a stabilizing effect on the sustainable investment landscape by improving data quality and comparability, reducing greenwashing risks, and increasing investor confidence.

Explore OneStop ESG Marketplace: Regulation and Compliance

Toward Greater Trust and Transparency in ESG Markets

The regulation of ESG ratings providers marks a pivotal evolution in the UK’s sustainable finance architecture. By introducing formal oversight and mandatory authorization, the government aims to close the credibility gap between ESG ambition and accountability ensuring that the tools used to measure sustainability are themselves held to rigorous standards. With ESG now influencing everything from corporate strategy to lending costs, the FCA’s oversight will likely set a new benchmark for transparency in the fast-growing global market for sustainability analytics. As the rules come into force, the UK will stand among the leading nations establishing clear guardrails for an industry that, until now, has operated largely on trust.

In the words of one FCA official, this legislation “brings the sunlight of transparency to a space that shapes where trillions in global capital will flow.”

Explore ESG Solutions on our marketplace - OneStop ESG Marketplace.

Keep abreast of the top ESG Events on OneStop ESG Events.

OneStop ESG Educate: Your go-to source for top ESG courses and training programs tailored to your needs.

Stay informed with the latest insights on OneStop ESG News.

Discover meaningful career opportunities on OneStop ESG Jobs.