FCA moves to clean up conflicts in ESG ratings and boost transparency

The Financial Conduct Authority (FCA) has announced plans to bring providers of ESG ratings and scores under formal regulatory oversight in a move aimed at improving transparency and tackling conflicts of interest. The UK watchdog said it will introduce measures to ensure methodologies, data sources and commercial relationships are disclosed more clearly so that investors and market participants can better understand how sustainability assessments are produced.

ESG ratings — assessments that evaluate companies on environmental, social and governance performance — have grown central to investment decisions, fund marketing and stewardship activity. But the proliferation of providers and opaque methodologies have raised concerns about inconsistent scores, undisclosed commercial ties and the potential for ratings companies to favour paying clients. The FCA’s initiative seeks to address those gaps by requiring clearer governance, disclosure and controls around conflicts.

While the regulator has not published a final rulebook, market participants expect the framework to include requirements for registration, clear conflicts-of-interest policies, transparency on scoring methodologies and more robust oversight of data sourcing and model changes. Such steps could raise operational and compliance costs for ratings firms and data vendors, and prompt asset managers to reevaluate which providers they use or to demand greater contractual protections.

For investors, the changes are designed to make ESG assessments more comparable and reliable, reducing the risk that a firm’s sustainability credentials are overstated or misunderstood. Pension funds and institutional investors, which increasingly rely on third-party scores for portfolio construction and reporting, may welcome the move as a way to bolster confidence in sustainability claims.

The FCA’s action also aligns the UK with broader international scrutiny of ESG information, as regulators worldwide weigh how to bring consistency and accountability to sustainability-related data and ratings. Providers that adapt quickly and transparently could gain competitive advantage, while those that resist increased oversight could face reputational and commercial pressure.

Ultimately, the regulator’s push aims to improve market integrity and investor protection in a fast-evolving segment of financial services. The precise scope and timing of the new rules will determine how disruptive the changes prove to be for ratings firms, asset managers and the data ecosystem that supports sustainable investing.