Britain has announced plans to introduce legislation next year to regulate the companies that rate environmental, social, and governance (ESG) performance. These ratings play a crucial role in directing billions of dollars into sustainability-focused investment funds.
Currently, ESG raters in the UK adhere to a voluntary code of conduct, which is viewed as a temporary measure until mandatory regulations similar to those in the European Union are implemented.
Finance Minister Rachel Reeves aims to establish Britain as a global leader in sustainable finance by improving transparency in ESG ratings, according to a statement issued from the finance ministry on Thursday.
The previous Conservative government had initiated a public consultation on regulating ratings providers and pledged to address the sector.
“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 ministry said in the statement, adding “The new approach will boost growth, help deliver a cleaner economy and ensure that companies in critical sectors like defence are not penalised by opaque ratings.
The new regulations are expected to foster growth, support a cleaner economy, and prevent penalization of companies in critical sectors, such as defense, due to unclear ratings.
The UK Sustainable Investment and Finance Association (UKSIF) highlighted that regulation should demystify the process, as varying ratings for the same company can confuse investors.
Consultants Hymans Robertson agreed that regulation could enhance transparency, but cautioned that it should not extend to those using ESG data to create investment products.
The ministry noted that the forthcoming law will align with the International Organisation for Securities Commissions (IOSCO) recommendations on ESG ratings.
Earlier this year, the European Union approved a similar law regulating ESG ratings in accordance with IOSCO guidelines.
Major rating providers include S&P Global, Moody’s, MSCI, the London Stock Exchange Group, and Morningstar’s Sustainalytics.