IA response to FCA consultation on ESG ratings

Commenting on the FCA’s consultation on ESG ratings (CP25/34), Carol Thomas, Director of Sustainability and Responsible Investment at the Investment Association, said: “We support the FCA’s proposed framework for regulating ESG ratings providers and see clear value in oversight given the growing influence of ratings on investment decisions and disclosures. The focus on building on existing rules, aligning with international standards and strengthening transparency and governance is welcome.  

“As the regime is developed, clear guidance will be essential to ensure consistency, support consumer understanding, avoid unnecessary duplication with the EU, and remain proportionate for smaller and specialist providers—while improving the quality and comparability of ESG ratings and maintaining the UK’s competitiveness as a global centre for sustainable finance.” 

In summary: 

• The IA welcomes the FCA’s proposed approach, particularly its emphasis on building on existing regulatory requirements, aligning with international standards and improving transparency, comparability and governance across ESG ratings providers. 

• We welcome that asset managers producing proprietary ESG ratings as part of FCA-regulated activities are out of scope of the new regime. We believe that existing regulatory regimes sufficiently address any risks from asset manager disclosures of ratings when part of a regulated activity, and we do not expect the FCA’s future assessment to identify significant gaps requiring additional obligations on asset managers, who are already subject to robust regulatory frameworks. 

•  The FCA should provide further guidance to support consistent interpretation of the regime, including greater clarity around exactly which firms and activities will be regulated, the treatment of proprietary or internal ratings when shared externally, and what the proposed narrowing of the UK Benchmarks Regulation means for the regulatory framework. 

• Given parallel EU legislation on ESG ratings and how many providers operate cross-border, the FCA should avoid duplicating the regulatory burden for firms, as well as draw on lessons from the EU regime to minimise divergence costs and support international operability for firms. 

• We also are keen to ensure that ESG ratings disclosures support retail investors’ understanding where ratings are used in communications to consumers.