The UK's financial watchdog has announced plans for a landmark regulatory overhaul, bringing providers of Environmental, Social, and Governance (ESG) ratings under its direct supervision for the first time.
Transparency and Conflict Concerns Prompt Action
The Financial Conduct Authority (FCA) launched a formal consultation on Monday 1 December 2025, citing significant worries about a lack of transparency and potential conflicts of interest within the rapidly growing sector. The move represents what is poised to be the most radical shake-up of sustainable finance regulation in UK history.
ESG ratings agencies assess how well companies and investment funds perform against various environmental and social criteria. As major funds have increasingly woven these factors into their strategies, the global industry has ballooned to an estimated value of $2.2bn (£1.6bn).
However, the FCA has highlighted a "paucity of transparency and consistency" among different providers. Many use differing, often opaque methodologies to reach their conclusions. A further key concern is that some agencies also offer ESG consultancy services to clients they are simultaneously responsible for rating, creating clear conflicts of interest.
New Rules for a Burgeoning Market
Under the proposed new regime, ESG ratings providers operating in the UK will be required to be authorised and supervised by the FCA. They will face obligations to share detailed information on their methodologies and data sources with the regulator.
Firms will also be forced to identify, manage, and publicly disclose any conflicts of interest. The consultation process is now open and will run until March 2026, after which final rules are expected to be implemented.
Balancing Regulation with Growth
This decisive step by the City watchdog comes despite a broader government drive to cut red tape and boost economic growth. Both the Chancellor and the Prime Minister have placed deregulation at the heart of their economic strategy.
Nevertheless, the FCA estimates its proposals will deliver net benefits of around £500m over the next ten years. These savings are anticipated to come from reduced due diligence and compliance costs for investors who rely on the ratings.
The regulator stated that the planned intervention has substantial backing from the investment community. In a consultation paper published on Monday, it noted that 95 per cent of investors surveyed supported the move to bring greater oversight to the ESG ratings market.
