- Article Summary
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Introduction
On 27 October 2025, the United Kingdom introduced new legislation in Parliament that sets the stage for full regulatory oversight of environmental, social, and governance rating providers. The announcement marks a significant moment for sustainable finance and reflects growing recognition of the influence these ratings have on investment choices and corporate strategy. Until now, a lack of consistent standards has limited comparability and created challenges for users. The new regime brings ESG rating providers serving the UK market under Financial Conduct Authority supervision and aligns the country with emerging international expectations.
Background
The rapid expansion of ESG ratings has led to a diverse mix of methodologies, scoring systems, and data sources. Investors have struggled to navigate inconsistencies, and stakeholders have flagged concerns about transparency and potential conflicts of interest. Although voluntary codes of conduct aimed to improve accountability, gaps remained in coverage and enforcement. International bodies such as the International Organization of Securities Commissions issued recommendations for stronger oversight. With the introduction of legislation in October 2025, the UK government signalled that a formal and enforceable framework is necessary to support trust in sustainability assessments.
New UK Regulatory Framework
The draft legislation introduced to Parliament on 27 October 2025 places ESG rating providers within the scope of the Financial Services and Markets Act framework. Ratings that are likely to influence investment decisions will be regulated. This definition narrows the focus to assessments used in financial markets rather than operational or procurement based scoring. Now that the legislation has been laid before Parliament, formal adoption is expected in the near term. The Financial Conduct Authority will consult on detailed rules before the end of the year and will also issue perimeter guidance to help clarify which ratings fall within scope. The supervisory regime will begin on 29 June 2028, followed by a one year transition ending on 29 June 2029. This extended lead time allows market participants and the regulator to prepare for implementation.
New UK Regulatory Framework
The draft legislation introduced to Parliament on 27 October 2025 places ESG rating providers within the scope of the Financial Services and Markets Act framework. Ratings that are likely to influence investment decisions will be regulated. This definition narrows the focus to assessments used in financial markets rather than operational or procurement based scoring. Now that the legislation has been laid before Parliament, formal adoption is expected in the near term. The Financial Conduct Authority will consult on detailed rules before the end of the year and will also issue perimeter guidance to help clarify which ratings fall within scope. The supervisory regime will begin on 29 June 2028, followed by a one year transition ending on 29 June 2029. This extended lead time allows market participants and the regulator to prepare for implementation.
In Scope And Out Of Scope Activities
| Activity Type | In Scope | Rationale |
|---|---|---|
| ESG ratings likely to influence investment decisions | Yes | Defined in legislation as the core regulated activity |
| Ratings produced only for internal use | No | Explicit exemption in the draft order |
| Ratings embedded in authorised investment research | No | Already covered under existing regulatory activities |
| Overseas ratings where no UK remuneration exists | No | Excluded because they do not target UK users |
| Procurement and supply chain ratings | Generally no | Typically not used in investment decision making |
Impact on Market Participants
The framework will apply to UK based ESG rating suppliers and overseas providers that serve UK clients. Ratings embedded in other already authorised activities or produced exclusively for private use may fall outside the scope. Because the definition focuses on ratings that influence investment decisions, many assessments used primarily for procurement, operational risk management, or supply chain due diligence may not be captured. Market participants will need to monitor upcoming FCA guidance closely to understand how their activities align with the perimeter. Investors, asset managers, and corporates should review their use of ESG scores, update procurement processes, and engage with providers regarding authorisation plans. Transition planning will be important in case certain suppliers do not enter the regime.
Who Must Obtain FCA Authorisation
| Provider Type | Required To Seek Authorisation | Basis |
| UK ESG rating providers | Yes | They conduct in scope regulated activity |
| Overseas providers serving UK clients for remuneration | Yes | Considered to be targeting the UK market |
| Overseas providers without UK remuneration | No | Explicitly excluded |
| Firms producing internal only ratings | No | Internal ratings are exempt |
| Firms providing ratings embedded in pre existing regulated activities | No | Covered under existing permissions |
Benefits And Risks
Regulating ESG raters can support greater transparency, reliability, and comparability across the sustainability data market. Clearer expectations around methodology disclosure and governance can strengthen independence and reduce the risk of greenwashing. Alignment with EU regulatory developments and international recommendations may also help improve consistency for global users. However, new obligations could encourage consolidation if smaller providers decide not to pursue authorisation. Compliance costs may rise, and users could experience disruption if certain rating products change or exit the market. The long preparation period aims to reduce these risks by giving firms time to adapt.
Conclusion
The introduction of legislation in October 2025 represents a decisive step toward a more structured and credible ESG rating environment in the United Kingdom. With the supervisory regime set to begin in 2028 and full implementation by 2029, market participants have a clear window to prepare. The effectiveness of the transition will depend on forthcoming FCA consultations and the clarity provided by perimeter guidance. As the regulatory framework takes shape, it will be essential for investors, corporates, and rating providers to stay informed and ready to adjust to a more transparent and accountable system for sustainability evaluations.
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