The Financial Conduct Authority (FCA), the UK’s conduct regulator for financial services firms and financial markets, announced the publication of new proposed transparency, governance and conflict of interest management requirements for ESG ratings providers.

The launch of the proposals follows the finalization of new legislation in October by the UK government to regulate ESG ratings providers, under the supervision of the FCA. The law applies to UK-based providers, as well as foreign providers offering ESG ratings in the UK.

According to the FCA, the new rules are aimed at making ESG ratings more transparent, reliable and understandable, citing its own research indicating that a majority of those who use ESG ratings express concerns about ESG rating providers’ systems and controls, such as use of outdated or inaccurate data and estimates, while 48% raised concerns about transparency in areas including methodologies and data sources, and many also had concerns about how existing or potential conflicts of interest could impact ratings.

In a statement announcing the launch of the new proposals, the FCA said:

“Introducing clear, proportionate rules for transparency and governance will help to build the market’s trust in ESG ratings and address concerns. “

In 2021, international securities regulator standards setter IOSCO called for regulators to focus on improving transparency in the ESG ratings and data space, and to begin to apply regulatory oversight. IOSCO also provided a series of recommendations for regulators, such as requiring providers to identify and disclose potential conflicts of interest, and to consider the data and methodologies used by the providers.

The FCA said that its new proposals build on the IOSCO recommendations, and also draws on the International Capital Market Association (ICMA) Code of Conduct for ESG ratings and data products providers, initiated with the help of the FCA, in order to support consistency and international competitiveness.

The FCA’s new proposals for regulation of ESG ratings providers focus on four key areas, including increased transparency, improved governance, systems and controls, identification and management of conflicts of interest, and setting clear expectations for stakeholder engagement and complaints handling.

In its approach to improve transparency, the FCA’s proposals outline a series of minimum public disclosure requirements for ESG ratings providers, including reporting on their product’s objectives, whether it assesses ESG risks, impacts or other dimensions, which factors are assessed across a wide range of E, S, and G areas, the meaning of the rating scale and categories, whether ratings are given as absolute values or relative to a peer group, and how the coverage universe of the product is decided.

The governance proposals include requirements for providers to have robust governance arrangements that are proportionate to their size and complexity, implement systems and controls that ensure ratings are based on thorough analyses of relevant and up-to-date information, ensure that methodologies are consistently applied, establish appropriate quality assurance processes and maintain internal records to support the ratings issued, as well as to have clear policies and procedures for reviewing methodologies and managing data quality. The proposals also include a requirement for providers to have an appropriate UK presence for effective supervision and accountability.

The proposals also include a series of requirements for ESG ratings providers to identify actual or potential conflicts of interest during the ESG rating process, maintain systems and controls to prevent and manage conflicts of interest, keep records of conflicts of interest of interest and to have an effective and transparent conflicts of interest policy.

Additionally, the proposals include a series of stakeholder engagement, complaints, and dispute resolution rules, including requirements to notify rated entities in advance of issuing the ESG rating for the first time and to give them an opportunity to correct factual errors, allowing rated companies to request the data used to produce the ratings, and to have a procedure for receiving and processing feedback from stakeholders such as users, and rated entities.

Sacha Sadan, Director of Sustainable Finance at the FCA, said:

“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.”

The FCA initiated a consultation into the new proposals, which will remain open until the end of March 2026, with plans to finalize its rules for ESG ratings providers in Q4 2026, and for the new requirements to come into effect from June 2028.

Click here to access the new proposals and consultation.