Introduction

At the end of March, the FCA consultation CP25/34 closed. The consultation concerned the regulation of ESG ratings, following the Government’s decision in October 2025 to legislate to bring this activity within the regulatory perimeter.

 

This legislation is expected to form part of the Financial Services and Markets (Sustainable Finance) Bill currently progressing through Parliament. The FCA has stated that it will publish a policy statement following the consultation in Q4 of 2026 with a view to the consequent rules coming into force in June 2028.  In the interim, the FCA is running a voluntary reporting pilot for ESG ratings providers to assess whether proposed reporting regime is proportionate and effective.  

 

Proposed regulatory framework

So, what can market participants expect in the Policy Statement?

 

For most, there should be no major surprises. The scope of ESG ratings in the consultation remains as currently defined at regulation 63Z7 of the Regulated Activities Order, essentially an assessment of an entity, issuer or financial instrument’s exposure to, and performance against, environmental, social and governance risks and characteristics, produced using an established methodology and ranking or scoring system.

 

As the consultation makes clear, and as anticipated by many, the proposed approach is also rooted in the in the international initiatives led by IOSCO, whose Recommendations for ESG Ratings and Data Products Providers (2021) provide a framework focused on transparency, governance, conflicts management and systems and controls.

 

The consultation also proposes a regulatory framework built around four problem areas identified through surveys, roundtables and market engagement:

 

1. Insufficient transparency: users cannot always easily understand methodologies, data sources or how ratings are produced. One‑third of users said they could not understand what an ESG rating measured, and more than a quarter struggled to access the underlying data.
2. Weak governance and systems: 55% of users reported shortcomings in providers’ systems and controls. These shortcomings include inconsistent application of methodologies across sectors, limited internal quality assurance, insufficient documentation of rating decisions, and weak oversight of data inputs and third‑party sources. The FCA’s consultation highlights the risk of misleading or non‑comparable ratings where methodologies are applied inconsistently or rely on inaccurate data that may be expired or incomplete.
3. Inadequate conflict‑management mechanisms: most providers offer a mix of data products, consulting and indices, which can create inherent potential conflicts of interest in their business models.
4. Limited engagement and complaints processes: many rated entities had no clear way to challenge factual errors or resolve issues. Some users reported errors persisting for months.

 

The cornerstone of this approach is to require minimum information disclosure regarding rating methodology, including information concerning objectives, data sources and types and use of AI. ESG ratings providers are also required to have specific governance systems in place, including a bespoke regime to manage potential conflicts of interest.

 

What should market participants look out for next?

Overall, the proposals have not been controversial. However, one perhaps overlooked element of the consultation is how the FCA addresses the impact of ESG ratings on market prices. This impact, likley to become more acute as the sector becomes regulated and otherwise matures, comes with two significant risks: (i) commercial risk to product producers (and those who invest in their products) and (ii) market abuse.

 

As to commercial risk, the consultation seeks to address this via a regime of stakeholder engagement, complaints and dispute resolution. It proposes that:

 

1. stakeholders are given advance notice of ratings prior to publication and give them an opportunity to correct factual errors (including a right to request the data on which ratings are based); and,
2. ratings providers have a procedure for receiving and processing stakeholder feedback.

 

The FCA appears to anticipate that disputes will be resolved by firms’ internal complaints processes, and the Financial Ombudsman Service thereafter (precisely how this will operate, and with what timeframes, is unclear at this stage). However, a disputed ESG rating may have a significant impact on an ESG product’s market price and, potentially, its commercial viability. Therefore, unless complaints procedures ensure that ratings are not published until any dispute is resolved, and or have a right to reply published with a rating where a conflict remains unresolved, product producers on notice of a rating pre-publication may seek other remedies. Product producers given advance notice of a rating they considered inaccurate or unfair may decide to sidestep the complaints procedure and take urgent legal action to prevent publication.

 

With regard to the financial crime, ESG ratings providers and their employees should take note that both the UK Market Abuse Regulations and the FCA’s Financial Crime Guide will apply to them, whilst the Money Laundering Regulations will not. In this respect, the consultation states that the FCA will not publish additional guidance within the MAR Sourcebook on how to interpret UK MAR in the context of ESG rating.  Nonetheless, firms and their advisors will be anxious to see what the regulator does do to help previously unregulated firms navigate the complexity of when, for example, an ESG rating at the pre-publication stage amounts to price sensitive information, and how then this can be appropriate disclosed to third-party stakeholders as part of the engagement process.

 

Next steps

From June 2027, providers will begin applying for FCA authorisation. The rules then come into force in 29 June 2028 and, subject to certain exceptions, providers carrying on ESG rating activities without authorisation may commit a criminal offence. For firms and individuals within scope, coming within the regulatory perimeter also introduces potential regulatory exposure to firm’s and their employees. For example, the FCA’s Principles for business, and handbook requirements will apply at the firm level, while the Senior Managers & Certification Regime is expected to extend accountability across key individuals involved in rating activities. Those firm’s coming into scope must, therefore, be prepared.  

 

This article has been written by James Tyler, Associate and Cara Haslam, Legal Researcher.