Chancellor Rachel Reeves has announced plans to bring forward a new law to regulate companies which provide ratings for environmental, social and governance (ESG), the Financial Times has reported.
The sustainability ratings sector is largely unregulated despite having a big influence over trillions of pounds worth of investment.
Projections show that $33.9trn (£27.5trn) of global assets will consider ESG factors within three years.
Ratings can shape the performance of investments and the credibility of the sustainable investment market.
On a visit to Toronto this week, Reeves reportedly said: “We are forging a new partnership with industry to get finance to the best, most innovative and most sustainable companies so that we can unleash Britain’s potential.”
Her plan progresses work started by former Conservative chancellor Jeremy Hunt.
Commenting on the news, Hymans Robertson head of responsible investment Simon Jones said: “External ESG ratings are a simple and effective tool for communicating assessments on companies and investment portfolios, but there are issues in how they have been perceived.
“While ESG ratings typically reflect the internal management of ESG risks, they are often conflated with providing an assessment of the external impact that a company may have.
“Coupled with the fact that there are often discrepancies in ratings produced by different agencies, this can create a lack of trust.
“Although there are products that make direct use of ESG ratings as a basis for captial allocation, we believe its is the underlying data which is used as an input to the ratings process that is more valuable.
“Product providers are increasingly creating their own bespoke methodologies which draw on multiple insights and data sources to develop investment products, rather than simply relying on the output from a single agency.
“Regulation of ESG ratings providers will be helpful if it promotes transparency and consistency or approaches.
“However, we would not want to see this regulation extended to those using ESG data solely for the purposes of creating investment products.”
In Focus: Should advisers use ESG ratings?
In March 2023, the Treasury, under the former government, released a consultation on regulating ESG ratings.
In March this year, the Treasury reaffirmed its commitment to give the Financial Conduct Authority powers to regulate ESG rating providers, to “improve transparency” in their processes.
The finance ministry said these providers will be regulated where assessments of ESG factors are used for investment decisions and influence capital allocation.
This is unlikely to affect those who are not that bothered about this woke acronym.