Government presses ahead with regulatory regime for ESG ratings providers

The new Labour government has confirmed it will push ahead with plans to bring in a regime for regulating ESG ratings providers.

The global ESG market is predicted to surpass $40trn by 2030.

Investors and markets are increasingly using ESG ratings to inform investment decisions and capital allocation.

The number of firms offering ratings on ESG factors has grown rapidly in recent years, and the differences in the methodologies behind these ratings can be problematic.

In March last year, the previous government published a consultation on the matter. This closed on 30 June 2023.

It sought views on the introduction of regulation for ESG ratings providers, description of ESG ratings and their provision, activities to exclude from regulation, sectoral and territorial scope of regulation, and making regulation proportionate.

It reaffirmed its commitment in March and August this year.

In its response to the consultation, published today (15 November), the government said its plans to bring ESG ratings providers into regulation are “driven by its support for this growing sector”.

It added that bringing ESG ratings providers into regulation will boost investor confidence, reduce greenwashing and address the lack of transparency highlighted in responses to the consultation.

This, it said, will help to drive investment, support innovation and ensure that companies in critical sectors are not penalised by opaque ratings.

It plans for a number of exclusions to apply, including not-for-profit entities and internal ESG ratings assessments.

In its document, the government laid out its process for designing, developing and introducing the new rules, which is expected to take approximately four years.

It aims to lay the requisite secondary legislation before Parliament in early 2025.

Following this, the Financial Conduct Authority will develop and consult on policy proposals, building in feedback to finalise the ESG ratings regime.

Affected firms will then go through the authorisations process, with the regime ultimately going live at the end of the authorisation gateway.

The government said this timeline is “subject to various factors”, including the number of firms in the scope of the regime.

Quilter Cheviot head of responsible investment Gemma Woodward said: “With deadlines for the Sustainable Disclosure Requirements also upon us, this has come at the right time given the sometimes over-reliance asset managers place on these metrics and ratings to meet their own regulatory reporting.”

She said the government has introduced a “sensible list” of those excluded from proposed regulation.

“We need to make sure that capital allocators are not overburdened and can make decisions on responsible and sustainable investments in a timely manner – that is the only way to help money flow into companies and projects that need it most.”

However, she warned: “This is not going to be a quick process, with the government indicating it will take four years to design and bring in.

“Clearly there will be teething issues with it all too, as with any regulation, and as such we may not see any improvement in the current regime for some time.”

The government’s response is drawn from 94 written consultation responses from 30 ratings providers, 14 ratings users, 10 rated entities, nine consultancies and advisory bodies and 31 others, including 22 trade bodies.