The UK’s financial watchdog is preparing to bring Environmental, Social and Governance (ESG) ratings agencies under formal regulation for the first time, in what is being described as the most sweeping overhaul of sustainable finance rules in the country’s history.
The Financial Conduct Authority (FCA) has launched a consultation setting out plans to police the rapidly expanding ESG ratings sector, which has grown into a $2.2bn (£1.6bn) global industry as investment managers increasingly embed ESG criteria into their strategies.
Ratings agencies assess companies and funds on environmental impact, social responsibility and governance standards. But the sector’s explosive growth has triggered persistent concerns about inconsistent scoring, opaque methodologies and potential conflicts of interest, particularly where ratings providers also offer consultancy services to the same firms they assess.
Under the FCA’s proposals, agencies would be required to disclose their methodologies and data sources, and identify and manage any conflicts. The move follows warnings from investors and regulators worldwide that divergent ESG scoring practices undermine confidence in sustainable finance.
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