Britain’s financial regulator has set out plans to subject environmental, social and governance rating providers to formal oversight for the first time, in a move designed to address longstanding concerns about transparency and potential conflicts of interest in the fast-expanding sector.

The Financial Conduct Authority announced on Monday that ratings firms would be required to make clear where conflicts may arise, such as when they assess companies’ ESG performance while also providing advisory services to help those same firms improve their scores. 

Providers would also need to specify which ESG factors they evaluate and publish details on how complaints are handled.

The ESG ratings industry has grown rapidly in recent years as investors seek clearer insight into companies’ sustainability performance. Yet trust in the sector remains uneven. 

Critics say methodologies vary widely and can be opaque, leaving investors uncertain about what a score truly represents and exposing the market to the risk of companies overstating their environmental credentials.

The FCA’s proposals aim to close those gaps. Under the new regime, firms would need to manage conflicts of interest rigorously and publicly disclose any that cannot be sufficiently mitigated. 

Employees involved in assessing a company’s ESG performance would be prohibited from trading in the securities of the entities they rate, a measure intended to bolster integrity and avoid the appearance of bias.

Chancellor Rachel Reeves has made sustainable finance a priority and has repeatedly stressed the need for greater transparency in the ESG ecosystem. 

The government sees the reforms as a step toward positioning Britain as a global leader in the field and strengthening confidence among institutional investors.

Currently, the market is governed by a voluntary code of conduct, which many asset managers argue lacks the teeth needed to safeguard credibility. 

The FCA’s plan would introduce binding obligations, and from June 2028, only regulated firms would be allowed to issue ESG ratings in the UK.

The regulator said the lengthy transition period reflects the substantial operational changes required across the industry and will allow firms time to adapt before full implementation. 

Market participants are expected to respond formally as the consultation process progresses.

With demand for ESG data continuing to grow and regulatory scrutiny intensifying globally, the FCA’s move represents one of the most significant steps yet to enforce standards in a sector critical to sustainable finance.