The government has introduced draft legislation to bring Environmental, Social and Governance (ESG) ratings providers under the remit of the FCA.

The regulator said the move, “marks a significant milestone in the UK’s commitment to enhancing transparency and trust in this market.”

It said it will launch a consultation on its proposed regulatory rules for ESG ratings providers, “before the end of the year.”

The FCA said that ESG ratings continue to play a critical role in influencing investment and capital allocation decisions.

It said the legislation, which was broadly supported by the industry, will provide the FCA with the necessary powers to regulate ESG ratings providers. It said the move is an important step towards ensuring that there are transparent, reliable and comparable ESG ratings.

The new legislation, which is yet to be laid before government, is The Financial Services and Markets Act 2000 (Regulated Activities) (ESG Ratings) Order 2025.

The order points out that “ESG ratings are a spectrum of products, usually marketed as providing an assessment of the ESG profile, characteristics, exposure to risks and/or impact of a company, fund, or other financial instrument. ESG ratings are widely relied upon by investors to guide investment decisions in line with sustainability risks, opportunities and preferences.”

It warns that: “The market has developed quickly and without formal oversight, leading to stakeholders and users raising concerns about transparency, governance arrangements, internal controls, and potential conflicts of interest within ESG ratings providers.”

The order says that following consultation, analysis and engagement with industry, the government has decided to legislate to require providers of ESG ratings to be authorised by the FCA and abide by relevant regulatory rules.

It said the intention is to “enhance the integrity of the market by fostering robust governance, effective management of conflicts of interest, and sound systems and controls, while also advancing transparency.”

The order says the legislation “will boost investor confidence and reduce greenwashing, addressing concerns highlighted in responses to the consultation, which overwhelmingly favoured regulation.”

The FCA said that in parallel with the Government finalising its legislation, it has been developing its regime for ESG ratings. It added that now that the legislation has been laid before Parliament, it intends to consult on its proposed rules before the end of the year.

It said its proposals will focus on four key areas: transparency, governance, systems and controls, and conflicts of interest. It said it will also be producing guidance to help firms assess whether their activities will fall under regulation and require authorisation.

The FCA said: “We are committed to working with industry, government and wider stakeholders to ensure our approach to regulation is practical, proportionate and supports innovation. This is an opportunity to raise the bar for transparency and trust, while ensuring the market remains competitive and resilient.”