On November 14, 2024, His Majesty’s Treasury (HM Treasury) announced the establishment of a regulatory framework for environmental, social, and governance (ESG) rating providers in the United Kingdom. This initiative aims to enhance transparency, reduce greenwashing, and increase investor confidence in ESG ratings. ESG rating providers will now be required to obtain authorization from the Financial Conduct Authority (FCA) and comply with its established rules.
The framework will draw on recommendations from the International Organization of Securities Commissions (IOSCO), emphasizing transparency, good governance, conflict-of-interest management, and robust control systems. A draft regulation is open for technical feedback until January 14, 2025.
The introduction of this regulatory framework in the UK marks a significant step toward standardizing and ensuring the reliability of ESG ratings. Investors should pay close attention to ESG rating providers that receive FCA authorization, as this will guarantee a certain level of quality and compliance with established standards. This regulation may also influence corporate ESG disclosure practices, making information more comparable and reliable for investment decisions. Investors are advised to closely monitor developments in this regulatory framework and assess its potential impact on their portfolios, considering ESG ratings provided by newly regulated entities.
