ESG Ratings - New Regulated Activity

A draft version of the Financial Services and Markets Act 2000 (Regulated Activities) (ESG Ratings) Order 2025 (Order) has been published.

The Order will amend the Regulated Activities Order (RAO) to make the provision of ESG ratings a regulated activity under the Financial Services and Markets Act 2000 (FSMA). This will require providers of ESG ratings to be authorised and supervised by the FCA.

The FCA has issued a statement welcoming this development, which will grant it the legislative powers to regulate ESG ratings providers. The FCA has also confirmed its intention to consult, before the end of this year, on its proposed regime for ESG ratings providers.

Background

ESG ratings are increasingly relied on by investors to assess the ESG profile of companies, funds or financial instruments. The rapid growth of this market, coupled with the lack of formal oversight, has led to concerns being raised about ESG ratings providers' transparency, conflicts of interest arrangements, internal controls and governance.

In March 2023, HM Treasury (HMT) published a consultation paper on the regulation of ESG ratings providers to seek to address these issues and enhance the integrity of the ESG ratings market. 95% of respondents supported the introduction of regulatory oversight. Alongside its November 2024 consultation response, HMT published a draft statutory instrument (an earlier draft of the Order) to bring the provision of ESG ratings into the regulatory perimeter. Having taken into account technical comments and undertaken further stakeholder engagement, HMT subsequently refined and amended the Order as appropriate.

Scope

An "ESG rating" (whether or not it is characterised as such), as defined in the Order, is an assessment regarding one or more ESG factors that is:

• produced in the form of an opinion (defined as an assessment involving substantial analytical input from an analyst), a score (defined as a measure derived from data and a pre-established statistical or algorithmic system or model, without additional substantial analytical input from an analyst), or a combination of both; and
• prepared using an established methodology and a defined ranking system of rating categories (a non-exhaustive list of examples of rating categories is provided in the definition of "rating category").

The new regulated activity (which will be in new article 63U of the RAO) is providing an ESG rating where the rating is likely to influence a decision to make a specified investment.

No regulated activity will be carried on where the person providing an ESG rating could not reasonably have expected it to influence a decision to make a specified investment.

For these purposes, "providing" means both producing the ESG rating and making it available (the latter includes, but is not limited to, issuing the rating to another person in hard copy or electronic form or publishing on a website or other digital medium). In other words, distributing an ESG rating will not, by itself, fall within the regulatory perimeter.

The geographical scope of the new regulated activity covers:

• UK-based persons providing ESG ratings to customers in the UK or overseas; and
• overseas persons providing, directly or indirectly, ESG ratings to UK customers.

However, the existing overseas person exclusion in article 72 of the RAO will be amended to provide that an overseas person providing a ESG rating to a UK customer will not be carrying on a regulated activity where they receive no remuneration in respect of the ESG rating from any person.

Exclusions

The new regulated activity will be subject to exclusions, to avoid dual regulation, and maintain proportionality and consistency. These exclusions include providing an ESG rating:

• in the course of carrying on (in each case, where the rating is not provided as a standalone product or service):
  • another regulated activity or ancillary service for which the provider has a Part 4A FSMA permission;
  • an activity within the scope of a market access arrangement (defined to include the amended overseas persons exclusion, among other things); or
  • an activity in relation to a recognised scheme or an alternative investment fund (AIF) marketed under specific legislative provisions;
• in the course of providing a benchmark that is outside the scope of the UK Benchmark Regulation, or is to be used to produce, or be incorporated into, a credit rating score orscoring system that is outside the scope of the UK Credit Rating Agencies Regulation (in each case, where the rating is not provided as a standalone product or service);
• intra-group where the provider does not reasonably expect the ESG rating to be made available outside the group;
• for private use, namely under a contract with another person where the ESG rating relates solely to that person and the provider does not reasonably expect it to be made available outside that person's group;
• in the course of charitable, academic or journalistic activities, where there is either no remuneration, other financial advantage or incentive, or where the ESG rating is provided on an occasional or one-off basis; or
• produced solely to comply with a legal or regulatory requirement (such as regulatory reporting) to which the provider is subject.

Timing and next steps

The Order has been laid before Parliament. The new regulated activity of providing ESG ratings is scheduled to come within the regulatory perimeter on 29 June 2028. This will be the main commencement date of the Order. There will be an earlier - as yet unspecified - commencement date, to enable the FCA and the Financial Ombudsman Service to consult on rules and guidance, and manage authorisation and variation of permission applications before the main commencement date.

The Order provides transitional and savings measures allowing persons that have applied for the necessary permission (or variation of permission) to carry on the new regulated activity to continue providing ESG ratings after the main commencement date if the FCA has not yet determined their application. In addition, the transitional regime will apply if applications are made outside the period specified by the FCA and are refused or withdrawn. In broad terms, firms operating under the transitional regime will be prohibited from undertaking any new ESG ratings activities following notification of their transitional status and they will be exempt from the requirement to hold permission for the provision of ESG ratings in respect of pre-existing contracts to produce ESG ratings, or to maintain a pre-existing public ESG rating. However, they will only be able to operate subject to specified obligations and FCA oversight.

The transitional and savings provisions will expire after one year, on 29 June 2029.

FCA consultation to follow

The FCA's consultation proposals - to be published later this year - will be informed by the recommendations of the International Organization of Securities Commissions (IOSCO) on ESG ratings and data products providers. The FCA's rules will be built around four key areas: transparency, governance, systems and controls, and conflicts of interest.

The FCA also intends to produce guidance to help firms assess whether their activities will fall within the scope of the regulatory regime and require authorisation. This suggests an awareness on the part of the FCA that it may not be a straightforward process for firms to determine whether their existing activities amount to "providing an ESG rating", as defined in the Order. It will also be important for firms to consider whether any exclusions will potentially be available to them. Although the introduction of the regime is some way off and the FCA has not yet published its proposals, these are two areas that firms may wish to start thinking about now.

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