Last week, the UK Treasury confirmed that it will regulate environmental, social and governance (ESG) rating providers. The announcement followed a year-long consultation which began in the wake of 2023’s Spring Budget.
The finance ministry said a new regulatory regime would improve “clarity and trust” in the ratings.
The decision was welcomed by the Financial Conduct Authority who said last week it would work to develop a “proportionate and effective” regime focused on “transparency”.
What are ESG ratings?
ESG ratings measure a company’s exposure to environmental, social and governance risks. These can include things like its energy efficiency, worker safety, and board diversity. They are becoming increasingly influential, with the government projecting that $33.9 trillion of global assets under management will consider ESG factors within three years.
Research has also shown that changes in ESG rating can lead to responses in financial markets and firm behaviour. However, rating providers’ methodologies and objectives have often been considered opaque and inconsistent.
Why regulate ratings providers?
In the consultation paper released last year, the Treasury said it saw a “clear benefit” from improving the transparency of methodologies, governance and processes of ESG ratings providers.
“Better ESG ratings would benefit consumers, who are often the end-users of investment products that increasingly rely on ESG ratings. As one of the first jurisdictions planning to introduce such regulation, this provides an opportunity for international leaderships by the UK,” it said.
When will we see the new regulation?
Currently, there is no specific timeline for this ESG rating regulation. However, the Treasury did confirm that a full response consultation response and legislative steps are due “this year.” That being said, a general election in the UK is also expected this year, which may impact the timing of this new regulatory regime.