The pensions and investment industry has welcomed the Financial Conduct Authority’s (FCA) proposed framework for environmental, social and governance (ESG) ratings providers, while suggesting refinements to ensure the regime is proportionate, internationally aligned, and addresses longstanding market concerns.

The proposals aim to improve transparency, governance and comparability in ESG ratings, which are widely used by pension schemes and asset managers in investment decision-making, following the government's decision to bring ESG ratings within the regulator's remit for the first time.

Responding to the consultation, Investment Association (IA) director of sustainability and responsible investment, Carol Thomas, said the organisation supported the FCA’s proposed framework, particularly its focus on building on existing regulatory requirements and aligning with international standards.

She emphasised that strengthened oversight was appropriate given the growing influence of ESG ratings on investment processes and disclosures, and welcomed the regulator’s emphasis on improving transparency, comparability and governance.

However, Thomas stressed that further clarity would be essential as the regime developed, particularly regarding which firms and activities fall within scope, how externally shared proprietary ratings will be treated, and how the proposals interact with the UK Benchmarks Regulation.

She also highlighted the importance of minimising duplication with parallel EU legislation, warning that divergence could create unnecessary costs for firms operating across jurisdictions.

In addition, the IA underscored the need for ESG rating disclosures to support retail investors' understanding, particularly when such ratings were used in consumer-facing communications.

Meanwhile, PensionBee also backed the FCA’s proposals but called for further measures to strengthen the regime, particularly around transparency, conflicts of interest and proportionality.

The provider described the introduction of a proportionate and internationally aligned framework as “long overdue”, noting the increasingly influential role ESG ratings played in shaping how companies were assessed by investors and the wider market.

However, PensionBee identified several persistent shortcomings in the current ESG ratings landscape, including limited transparency in methodologies, structural conflicts of interest in which providers offered consulting services to rated entities, and a disproportionate burden on smaller companies due to complex data requests.

It also raised concerns about the lack of effective mechanisms for rated entities to challenge their ratings or seek redress.

To address these issues, PensionBee called for clearer disclosure requirements regarding factual corrections and their impact on ratings, as well as stronger obligations for providers to disclose conflicts of interest, including commercial relationships with rated entities.

The firm also advocated for greater proportionality in ESG data collection, including increased standardisation and the use of pre-populated data to reduce reporting burdens on smaller companies.

In addition, it recommended broadening the definition of complaints to include reputational harm and establishing a clear escalation route to the FCA for non-compliance.

Commenting on the consultation, PensionBee chief investment solutions officer, Clare Reilly, described the proposals as “an important step” towards a more robust ESG ratings framework, but argued that further enhancements were needed to fully address existing market weaknesses.

She warned that without greater visibility over rating methodologies and clearer disclosure of commercial relationships, there remained a risk that ESG ratings could be influenced by factors not visible to the market, potentially undermining confidence in their integrity.

Reilly also highlighted the need for the regime to better reflect the realities faced by smaller listed companies, noting that ESG data requests were often designed with larger corporates in mind, creating disproportionate operational burdens.

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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