The way companies are judged for their environmental, social, and governance (ESG) actions is becoming more important every year. Investors, companies, and even governments use ESG ratings to decide where money should go and how businesses should improve. But many people have started to worry that these ratings are not always clear or consistent. Because of this, the UK’s Financial Conduct Authority (FCA) has announced new plans to regulate ESG rating providers and make the entire system more trustworthy.
These new rules could help the UK become a leader in the global ESG market, which is growing very quickly. Experts say the market for ESG data could reach over $2.2 billion next year. With numbers that large, it makes sense that the FCA wants to make sure these ratings are accurate and reliable.
Why the FCA Is Getting Involved
ESG ratings influence many important financial decisions. Investors use them to choose which companies to support. Asset managers use them to build investment funds. Companies use them to understand what they need to improve. But even though these ratings are widely used, the methods behind them are often not explained clearly.
The FCA found that:
- 55% of users worry about how ESG ratings are created, and
- 48% say the ratings are not transparent enough.
This means many people do not feel confident that the scores truly reflect what a company is doing. Some rating agencies use limited data, while others use very different methods, making it hard to compare companies fairly. Investors and businesses have asked for more clarity, and now the FCA is responding.
The UK government has already decided that ESG rating providers should fall under official regulation. In an earlier consultation, 95% of respondents agreed that the FCA should take charge. This strong support helped push the new plan forward.
A Four-Pillar Plan for Better Ratings
The FCA’s proposal focuses on four main areas: transparency, good governance, conflict management, and better communication.
1. More Transparency
ESG rating providers will need to explain:
- how they build their scores,
- what data they use,
- what assumptions they make, and
- what the limitations are.
This will help investors and companies understand why a score was given instead of treating ESG ratings like a mystery. Better transparency also makes it easier for people to compare ratings from different providers.
2. Stronger Governance
The FCA wants rating agencies to have clear processes and quality controls. That means:
- well-documented decisions,
- proper review systems, and
- oversight structures that ensure accuracy.
Strong governance helps prevent mistakes and makes ratings more reliable.
3. Managing Conflicts of Interest
Some ESG rating companies offer other services, such as consulting. This can create conflicts if the same company rates a business and sells advice to it. The FCA wants providers to:
- identify conflicts,
- manage them properly, and
- clearly explain them to users.
This builds trust and reduces the chance of biased ratings.
4. Better Engagement and Complaints Handling
Rating agencies will need to create easy ways for companies and users to ask questions or raise concerns. This helps solve disputes faster and makes the system more open and fair.
The FCA also stressed that smaller providers will not face the same requirements as giant global firms. This approach supports innovation while making sure key risks are controlled.
Why This Matters for the Future
The global ESG data market is expanding rapidly. More investors want to understand how companies handle climate issues, workers’ rights, and corporate behavior. Because of that, the information behind ESG ratings directly influences financial markets.
By aligning its new rules with international guidelines, such as those from the International Organization of Securities Commissions, the UK hopes to stay competitive. Countries are now realizing that sustainable finance is not only about helping the planet — it is also tied to national economic strategy.
Sacha Sadan, the FCA’s director of sustainable finance, explained that the rules will help give investors more trust in the ESG system. According to him, these changes will support the UK’s goal of being a leading hub for sustainable finance.
What Companies and Investors Should Watch
If the plan becomes official, the UK would be one of the first major nations to regulate ESG ratings directly. This could have several effects:
- Companies may need to improve the way they report sustainability data.
- Asset managers may find it easier to compare ratings and reduce risk.
- Investors could make decisions with more confidence, knowing the ratings are backed by clearer rules.
But these changes may also shift how companies are evaluated, which could affect their reputation, investor interest, and even their cost of capital.
What Happens Next
The consultation remains open until March 31, 2026, and the final rules are expected by the end of 2026. If approved, the new system would begin in June 2028. The FCA says it will support firms as they prepare for these changes.
As ESG becomes a key part of global finance, the FCA’s plan shows how important it is to have strong, fair, and transparent standards. These rules could help shape not only how companies are judged, but also how sustainable the world’s financial systems become.
