HM Treasury consults on regulatory regime for ESG ratings providers

On 30 March 2023, HM Treasury published a consultation paper (CP) on a proposed regulatory regime for ESG ratings providers under the Financial Services and Markets Act 2000 (FSMA). The CP includes the proposed scope of the regulatory regime that will regulate a wide range of ESG ratings used in financial markets, but not ESG data. An ESG rating in the context of the proposed regime would include any assessment of ESG factors, regardless of whether it is called a rating.

What’s the background?

On 22 November 2022, the FCA announced that it is introducing regulatory oversight of certain ESG data and ratings providers in the form of a voluntary Code of Conduct (the Code). The Code is intended to be “internationally consistent” by taking into account developments in other jurisdictions (for example, ESMA’s call for evidence on ESG rating providers that we reported on here) as well as recommendations from the International Organization of Securities Commissions’ (IOSCO) (read our insights on the IOSCO call for action here.) Against the backdrop of both international and domestic recognition of the need for regulation of ESG ratings providers, HM Treasury has jumped on the bandwagon with this consultation.

What does the consultation propose?

The CP suggests regulating the direct provision of an ESG rating to a user in the UK, where the assessment is used in relation to a specified investment under the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (SI 2001/544) (RAO), unless an appropriate exclusion applies. HM Treasury expects that these changes will involve adding one or more new regulated activities to the RAO. It’s proposed that both UK and overseas ratings providers who directly provide ratings to UK users would be caught by the regime with the possibility that further activities may be brought within its scope.

The CP highlights that the potential amendments to RAO would require ESG ratings providers brought within the FSMA perimeter to become FCA authorised firms. It also indicates that these changes could involve legislation for a sub-set of ESG ratings providers such as legislation under the Designated Activities Regime once the Financial Services and Markets Bill 2022-23 reaches Royal Assent.

Following an FCA consultation, HM Treasury anticipates that the FCA’s regulatory approach would take the main elements of the IOSCO recommendations as a starting point.

What happens next?

The deadline for feedback on the consultation’s proposals is 30 June 2023.