By Phoebe Seers
LONDON, Dec 1 (Reuters) – Britain’s financial regulator on Monday set out plans to bring providers of environmental, social and governance ratings under its supervision, aiming to boost transparency and address concerns over conflicts of interest.
Under the proposals, the Financial Conduct Authority would require ratings firms to disclose potential conflicts, such as when they both score companies on ESG performance and advise them on improvements.
Providers would also need to clarify which ESG factors they assess and publish details on how they handle complaints.
The ESG ratings industry, currently subject to a voluntary code of conduct, has boomed in recent years.
However, trust in these ratings remains uneven, with investors concerned about opaque methodologies and the risk of companies overstating their green credentials.
Britain’s finance minister Rachel Reeves wants to cement Britain as a world leader in sustainable finance, including by addressing the lack of transparency behind ESG ratings.
The regulator said the rules would come into force in June 2028. After that, providers not FCA-regulated will no longer be able to give ESG ratings.
MORE TRANSPARENCY
Under the proposals, firms would be required to manage conflicts of interest and, where they cannot prevent a conflict from undermining the integrity of a rating, publicly disclose the details.
Employees involved in producing a rating would also be prohibited from trading the securities of the entity being rated.
Around 5,400 UK financial firms spend a combined 622 million pounds ($822.60 million) annually on external ESG ratings.
The FCA said 95% of respondents to a government consultation backed regulation of the sector.
Andy Ford, head of responsible investment at UK wealth manager St. James’s Place, said the new rules would clarify what drives ratings but warned investment managers not to rely too heavily on them.
“We want ratings as one input, alongside in-house analysis, not a substitute for judgment,” he said.
The proposals follow legislation introduced in October to bring providers within the FCA’s remit.
The EU is also drawing up rules for ESG ratings providers, with both UK and EU frameworks based on principles set by global securities watchdog IOSCO.
Providers include MSCI, Morningstar-owned Sustainalytics, S&P Global and the London Stock Exchange Group’s Refinitiv and FTSE Russell.
(Reporting by Phoebe Seers; Editing by Tommy Reggiori Wilkes and Ros Russell)
