The Financial Conduct Authority (FCA) has unveiled proposals to ensure that environmental, social and governance (ESG) ratings are transparent, reliable and comparable, following the government's decision to bring ESG ratings within the regulator's remit for the first time.

The reforms, which are expected to generate around £500m in net benefits over the next decade, form part of a new consultation launched by the FCA, which is open until 31 March 2026.

According to the regulator, the decision to bring ESG ratings into formal supervision was backed by 95 per cent of respondents, reflecting the growing importance of these products across investment markets.

Indeed, the FCA’s own analysis showed that ESG ratings are now embedded across key investment processes, with the pensions and retirement income sector among the heaviest users.

In particular, the FCA found that nearly half of pension firms rely on ESG ratings for portfolio construction, reporting and stewardship, influencing investment decisions across an estimated median asset base of £22bn.

However, the FCA highlights persistent concerns among institutional users, including UK pension schemes, who cite limited transparency around how ratings are constructed.

Research in the consultation paper finds that 55 per cent of users worry about how ratings are built, while 48 per cent question the transparency of methodologies and data.

The regulator also notes that many schemes report difficulties in challenging factual inaccuracies or engaging meaningfully with ratings providers.

Under the new proposals, all ESG ratings providers operating in the UK would be required to meet strengthened standards covering transparency, governance, systems and controls, conflicts of interest, and stakeholder engagement.

This would include clearer public disclosures of methodologies and data sources; enhanced governance and oversight requirements; and new rules allowing rated entities and users to correct factual errors, both before and after publication.

The changes follow previous comments by the FCA, which said it was considering how to streamline and enhance its sustainability reporting framework for asset managers, life insurers, and FCA-regulated pension providers to ease "unnecessary" burdens.

Looking ahead, the regulator said it expects the updated regime to “increase trust and confidence” in ESG ratings and reduce what it estimates to be £495m per year in market-wide costs, driven largely by additional due diligence work undertaken by asset managers and pension schemes to understand or verify ratings.

FCA director for sustainable finance, Sacha Sadan, said the proposals are designed to reinforce the UK’s position as a global sustainable-finance hub.

“Our proposals will give those who use ESG ratings greater trust and confidence - supporting our goal of increasing trust and transparency in sustainable finance,” he argued.

“This will enhance the UK’s reputation as a global sustainable-finance hub - attracting investment and supporting growth and innovation.”

The FCA estimates that the package will ultimately deliver a net benefit of around £577m over 10 years, with improved transparency reducing duplication and inefficiency across the investment chain.

Also commenting on the proposals, EY EMEIA financial services risk, compliance, and regulatory technology leader Mike Zehetmayr said that if implemented effectively, they would "reinforce the UK's position as a global sustainable finance hub by unlocking capital for the transition."

The final rules are expected in Q4 2026, and the new regime is set to take effect from June 2028.

Meanwhile, the FCA will open an authorisation gateway for ratings providers in 2027 and plans to support firms preparing to enter the regime.

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