Future regulatory regime for Environmental, Social, and Governance (ESG) ratings providers

In view of the increasing significance of ESG data and ratings in making investment decisions and in view of the current shortcomings in this context (lack of transparency, poor governance, poor handling of conflicts of interest), the HM Treasury has launched a new consultation on a new, quite general regime for ESG rating providers. Specifically, the Treasury proposes to bring ESG providers under the remit of the Financial Services and Markets Act 2000 by designating the provision of ESG ratings to persons located in UK „in relation to an RAO specified investment as a new regulated activity in the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001. The purpose of the regime, so the Treasury, is to achieve the following objectives and outcomes:
Figure 1: Objectives of the New Regime

The new regime would thereby be in line with the recommendations of the International Organization of Securities Commissions (IOSCO) and would include the following key aspects. It shall be noted at this point that any further regulatory requirements (governance obligations, conflicts of interest obligations, disclosure obligations, etc.) beyond the general scope of application shall be determined by the Financial Conduct Authority (FCA) at a future point in time.
##### Proposed Scope of Application: The new regime would
– apply to all activities involving „an assessment regarding one or more environmental, social, and governance factors“ regardless of the fact whether or not such activity is labelled as such.
– NOT apply to the use or processing of pure raw data so long as no assessment is performed on this data.
– NOT apply to situations where the ESG ratings are provided by non-profit organizations or by firms that use their own ESG ratings internally only.
– NOT apply to proxy advisory services or to investment research products or other related activities (e.g. consultancy services).
– apply to the provision of direct ESG ratings to UK users only, both institutional or retail (no re-use is included).
– apply to rating providers from the UK AND elsewhere, if services are provided to (legal) persons located in UK.
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Besides the above noted scope of application, the Treasury seeks information on whether or not it should and – if so – how to best make the new regime proportionate to the size of a firm. Several alternatives are presented, ranging from not excluding small firms at all from the regime, to the disapplication of the regime for firms meeting specific turnover, employee, or asset size thresholds.
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The consultation will run through June 30, 2023.