The UK has said that it plans to propose a new law to regulate ESG ratings providers.

Chancellor of the Exchequer Rachel Reeves has said that the lack of transparency in ESG ratings needs to be addressed as the EU discusses the introduction of rules governing ratings providers in the region.

The UK Treasury said in a statement, “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 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.” .

Paris Jordan, head of responsible investment at Charles Stanley, said, “The focus on ensuring users are well-informed and understand the criteria used in the ratings process is a key area that needs improving. Condensing multiple factors into a singular rating has oversimplified a highly complex process, has been reductive and has led to well-intended but inadvertent miscommunications with clients. Ensuring sensible usage of the ratings will be key.

Ratings play a key role in the sustainable finance industry, and the breadth of approaches should be celebrated as a healthy competitive environment. However, with any evolving industry, guardrails to protect consumers should be in place. Ensuring that users understand that ratings are an outcome of fundamental assessments, and ultimately opinions of analysts, rather than external oversight standards will be crucial to the proposed review/regulation.

Protections are key here rather than prescription: standardisation of ratings is not something we encourage as active decision making is essential within the sustainable space. Any proposed standardisation should be limited to the raw data provision and encouraging the adoption of ISSB, rather than restricting healthy competitive analysis. The government will also need to consider how any of these regulations work alongside the new SDR labels, ensuring they are complementary rather than opposing.”

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