Strengthening Sustainable Investment: FCA to Regulate ESG Ratings Providers

ESG ratings measure an organisation’s environmental, social and governance performance – factors that increasingly influence investment strategies and capital allocation decisions. Investor demand for ESG ratings and data products has surged as sustainability becomes central in corporate and consumer decision making. This trend has driven rapid growth in both the number of providers and the diversity of organisations offering ESG ratings. This momentum remains strong, with the Organisation for Economic Cooperation and Development (OECD) having projected that the ESG data and related services market would grow at an annual rate of 23% through 2025.

The UK’s Proposed Regulatory Approach

ESG data and ratings activities in the UK have, until now, operated largely without regulatory oversight. Rapid growth and a lack of clear standards have sparked criticism, particularly over transparency and comparability, as providers often apply inconsistent metrics and weightings. This is set to change with the Financial Services and Markets Act 2000 (Regulated Activities) (ESG Ratings) Order 2025 (the Order), which places ESG rating providers under the supervision of the Financial Conduct Authority (FCA). Scheduled to take effect on 29 June 2028, the regulation is built around four core pillars: transparency, governance, robust systems and controls, and effective management of conflicts of interest. The framework draws on recommendations from the International Organization of Securities Commissions (IOSCO), ensuring alignment with global best practices while tailoring rules to UK market needs.

Providing an ESG rating will now be classified as a ‘specified activity’ when it can reasonably be expected to influence an investment decision. Ratings not reasonably anticipated to affect investment decisions fall outside the scope of the regime. This introduces a ‘reasonable expectation’ test, distinguishing ratings intended for investment purposes from those produced for general information or non-investment use. Meeting these criteria brings the provision of a relevant ESG rating within the definition of a regulated activity under the Financial Services and Markets Act 2000 (FMSA). As a result, ESG rating providers operating in the UK will be required to comply with the new standards and obtain authorisation from the FCA. Providers will also need to publish clear disclosures explaining the rationale behind ratings, the factors considered, and governance arrangements.

The FCA has signalled its intent to adopt a practical and transparent approach aimed at supporting innovation while preserving market competitiveness. Notably, while ESG rating providers will fall within the scope of new regulation, ESG data providers will remain outside it – reflecting the more transparent and verifiable nature of raw data compared to evaluative ratings. Section 6 of the Order also introduces several exemptions, such as ratings used exclusively within private contractual arrangements, and includes transitional provisions allowing firms to continue certain activities while awaiting authorisation.

Aims and International Reach

In April 2025, German prosecutors fined asset manager DWS €25 million after a probe revealed the firm had misled investors about the ESG credentials of some investments between 2020 and 2023. The case, which follows a settlement in the US over similar allegations, underscores regulators’ determination to clamp down on greenwashing and to improve transparency in sustainable finance.

The FCA has stressed that introducing regulation for ESG rating providers is intended to reinforce the UK’s position as a global hub for sustainable finance. Under the proposed framework, overseas ESG rating providers offering services in the UK may also be required to obtain FCA authorisation, depending on the extent of their market impact. Consequently, foreign providers, such as US-based firms, will fall within the scope of the UK regime if their ratings are reasonably expected to reach UK clients, unless those ratings are provided free of charge.

Compared with the EU’s ESG Ratings Regulation (EU 2024/3005), the UK framework encompasses a broader range of activities but currently lacks specific pathways for overseas market access. The FCA plans to consult on potential mechanisms, such as equivalence or recognition, for non-UK providers. Despite these differences, the UK approach remains broadly aligned with the EU regime, which takes effect in July 2026 and will require providers operating in Europe to register with the European Securities and Markets Authority (ESMA).

Conclusion

The FCA’s move to regulate ESG rating providers marks a pivotal step in strengthening the integrity and transparency of sustainable finance in the UK. As ESG ratings play an increasingly important role in shaping investment strategies and capital allocation, the new framework will introduce much-needed stability and transparency to a rapidly expanding market that has, until now, operated without clear regulation. Establishing the UK as a leader in ESG ratings regulation will be critical in its ambition of remaining a global hub for sustainable finance. This initiative not only responds to growing concerns but also ensures the UK keeps pace with international developments, including the EU’s ESG Ratings Regulation.

Crucially, the regulation targets ratings intended to influence investment decisions, striking a balance between strict regulatory standards and a transparent approach that supports market competitiveness. Exemptions and transitional provisions further underscore the FCA’s pragmatic approach, facilitating a smooth implementation and ensuring the longevity of the new regulatory framework.

As with other areas where regulatory oversight has increased, there is potential also for an increase in civil liability.  We expect greater scrutiny and potential claims arising from the forthcoming regulations.  If you would like to discuss the issues raised in this note, please contact the authors.

Beale & Co’s specialist lawyers are well‑placed to support clients navigating emerging ESG regulation, with experience advising across project lifecycles on construction, environmental risk, and insurance issues. If you’re interested in finding out more about the issues covered in this article or wish to discuss any matters arising, please contact Nathan Modell or Michael Salau.

For more information on wider environmental issues or key trends impacting the construction, engineering, and infrastructure sectors and how these might impact your business, please visit our website.