The UK government will introduce legislation aimed at regulating ESG ratings providers in 2025, according to a speech Wednesday by Chancellor of the Exchequer Rachel Reeves, and confirmed today in a statement by the finance ministry, HM Treasury.

The statement said that “the Chancellor sees an opportunity to work with industry to drive more investment and cement the UK as a world-leader in sustainable finance, starting by addressing the lack of transparency behind ESG ratings.”

The new planned law would place ESG ratings providers under the supervision of the Financial Conduct Authority (FCA), according to media reports.

The initiative comes as pressure builds to regulate providers of ESG ratings, with demand growing rapidly in recent years as investors increasingly integrate ESG considerations into the investment process, while the activities and businesses of the providers are generally not covered by markets and securities regulators.

In November 2021, securities regulator standards setter IOSCO urged regulators to focus on improving transparency in the ESG ratings and data space, and to begin to apply regulatory oversight. IOSCO also provided a series of recommendations for regulators, such as requiring providers to identify and disclose potential conflicts of interest, and to consider the data and methodologies used by the providers.

Since IOSCO launched its recommendation, several jurisdictions have moved to increase oversight in the space, including the EU, where lawmakers recently agreed to bring ESG ratings providers under the authority of European markets regulator ESMA and to introduce rules to increase the reliability and comparability of ESG ratings and prevent providers’ conflicts of interest.

In the UK, the FCA launched a voluntary code of conduct earlier this year for ESG ratings and data products providers, and the prior government announced that it would conduct a consultation into regulating ESG ratings providers as part of an updated Green Finance Strategy launched last year aimed at establishing the UK as a center for international green finance.

In the statement, HM Treasury said:

“Rachel Reeves has asked the Treasury to respond quickly to an industry consultation on a new regulatory regime for ESG rating providers and bring forward legislation next year.”

The statement added that the regulation would aim to “boost growth, help deliver a cleaner economy and ensure that companies in critical sectors like defence are not penalised by opaque ratings,” and that it would align with IOSCO’s recommendations.

Sustainable finance groups welcomed the government’s plans. Following the announcement, UK Sustainable Investment and Finance Association (UKSIF) CEO James Alexander said:

“A lack of clarity and transparency around some ESG ratings, where providers can sometimes come out with vastly different ratings of the same business, have caused confusion by not clearly outlining the methodologies used. This regulation should help open the black box on these sorts of judgments, not by forcing agreement or consensus, but by shining a light on how the underlying data is gathered and how ratings are calculated.”