ESG ratings providers: UK legislation will bring sector within FCA regulation

The UK Government has been working to finalise the legislation required to bring Environmental, Social and Governance (ESG) ratings providers into the remit of regulation. The Financial Services and Markets Act 2000 (Regulated Activities) (ESG Ratings) Order 2025 (the Order) was laid before Parliament on 27 October 2025, accompanied by a draft Explanatory Memorandum providing the background to the Order and an explanation of how it will apply.

The draft Order designates the provision of ESG ratings as a regulated activity under the Financial Services and Markets Act (FSMA) with the commencement date of 29 June 2028. This means ESG ratings providers will require FCA authorisation by this date unless they fall within defined exclusions or benefit from certain savings and transitional provisions. 

In parallel with the Government’s work, the FCA is in the process of developing its rules-based regime, which it will consult on by the end of the year.

In this blog post we consider the new framework and key impacts for affected entities.

Enhancing reliability, transparency and comparability of ESG ratings

The regulation of ESG ratings providers has been broadly welcomed in the UK as an important step towards improving the reliability, transparency and comparability of ESG ratings. It is intended to boost confidence in the market and reduce the risk of greenwashing by enhancing transparency and ensuring strong governance, effective conflicts management processes and sound systems and controls. 

With ESG ratings playing a critical role in influencing investment and capital allocation decisions in line with sustainability risks and opportunities, the UK Government announced last year that it would go ahead with plans to regulate ratings providers and published draft legislation for comment. In the UK, the Code of Conduct for ESG Ratings and Data Products Providers, launched in 2023, has so far provided a voluntary framework to improve trust in the market. 

The relevant regulatory rules and guidance applicable to ratings providers that fall within the scope of the Order will be adopted by the FCA following consultation.

Targeted scope and exclusions

With the Order now laid before Parliament, the UK has started the process of moving from voluntary standards to statutory regulation. In our previous blog post, we explored some key aspects of the proposed regime. However, the Order has now introduced various amendments and clarifications, including several useful exclusions, which we consider below.

Targeted scope 

The provision of ESG ratings will be a regulated activity when the rating is likely to influence a decision to make a specified investment. The UK regime will therefore focus on the likelihood of a specific use. Where a provider cannot reasonably have expected the rating to influence an investment decision, then that rating will be outside the scope of the regulated activity.

ESG ratings falling within the regime are defined as assessments regarding one or more environmental, social or governance factors, which are prepared as an opinion or a score (or a combination of both) using an established methodology (i.e. techniques and procedures used systematically to identify, collect, analyse and interpret data in order to produce a rating) and a defined ranking system of rating categories (which may include colour-coding or other symbols, numbers or letters). 

A firm will be providing an ESG rating under the provisions of the Order only if it both produces the rating and makes it available (e.g. by issuing the rating to another person in hard-copy or electronic form or publishing it on a website). Firms that only distribute ratings produced by others would therefore not be in scope. 

Territorial application – UK and overseas providers

The regime will capture UK-based ESG ratings providers whether they provide ESG ratings to clients in the UK or overseas and regardless of whether they are remunerated for the service. 

In addition, where an ESG rating is provided, directly or indirectly, to a UK customer by an overseas entity, this activity will fall within scope of the regime unless the overseas provider receives no remuneration in respect of the ESG rating. This includes circumstances where the rating is provided to a non-UK person, but the provider could reasonably expect the rating to be made available to a person located in the UK. It should be noted that remuneration is broadly defined to include any commission, fee, charge or other payment, including an economic benefit of any kind or any other financial or non-financial advantage or incentive. 

Targeted exclusions

The Government has sought to ensure a targeted and proportionate application of the regime by allowing a number of exclusions from the regulated activity. These have been expanded from the Government’s initial proposals, including in respect of overseas ESG ratings providers.

Pursuant to a regulated products and services exclusion, a separate ESG rating authorisation will not be needed if the ESG rating is provided in the course of carrying on certain other types of activities, including:

• a regulated activity or ancillary service for which the firm is already approved by the FCA;
• an activity that falls within a market access arrangement for overseas providers; or
• an activity that relates to a recognised scheme (e.g. under the Overseas Funds Regime or section 272 of FSMA) or an alternative investment fund marketed into the UK under the National Private Placement Regime. 

However, the regulated products and services exclusion will not apply where an entity provides ESG ratings as a standalone service.

An exclusion will also be available for the provision of ESG ratings that can be characterised as a benchmark under the UK Benchmarks Regulation, including where benchmarks are exempted under that Regulation or benefit from third-country regime transitional provisions.

In addition, the provisions of the Order seek to exclude intra-group ESG ratings where the rating is provided by one group member to another and the provider does not reasonably expect the rating to be made available outside the group, or where the rating will only be made available outside the group as part of carrying on activities that are subject to the regulated products and services exclusion. 

Other exclusions include ESG ratings used in the production of credit ratings, ratings produced solely for legal or regulatory compliance, ratings for private use (where the rating relates solely to the person it is provided to) and ratings provided as part of proxy advice services.  

Transitional and savings provisions

The Order includes a framework for savings and transitional arrangements. As the FCA will be able to deal with applications for permission ahead of the ‘main commencement day’ of 29 June 2028, the regulator may specify time periods for such applications to be made. Existing ESG ratings businesses that apply in the specified period will, except where the FCA determines that transitional provisions apply, be treated as though the new regulated activity is not yet in force in the unlikely event that their application has not been determined by the main commencement day. 

Transitional provisions may apply in other cases, including where applications are refused or withdrawn. Firms operating under the one-year transitional regime (ceasing on 29 June 2029) will be prohibited from undertaking any new ESG ratings activities following notification of their transitional status, but they will be exempt from the requirement to hold permission in respect of pre-existing contracts to produce ESG ratings or maintain pre-existing public ratings. 

The FCA’s approach

The ability to deal with applications ahead of the new approval requirement coming into effect should allow the FCA to manage the authorisations process in a timely and orderly manner. 

The FCA intends to consult on its proposed rules by the end of 2025, focussing on four key areas: transparency, governance, systems and controls, and management of conflicts of interest. It will also provide guidance to help ESG ratings businesses determine whether their activities fall within scope and require FCA authorisation.

What does this mean for the industry?

The new regime is primarily aimed at entities whose business involves deliberately producing ESG ratings. However, it may also impact others whose activities include the production of scores or opinions that fall within the broad definition of an ESG rating. With the regime set to take effect in 2028, impacted entities across the industry should familiarise themselves with the new regime and consider whether their activities will be likely to fall within regulation. This may involve an assessment of current and planned activities against the scope of the regime, including available exclusions, and the potential impact on operations in the UK and elsewhere. ESG ratings providers that consider they will fall within scope of the regime should prepare for FCA authorisation and compliance. Engaging with the FCA’s upcoming consultation will be crucial to help such businesses stay ahead of regulatory changes.

Where entities operate across several jurisdictions, they may need to consider how to comply with potentially overlapping or conflicting regimes. In particular, the interaction with the EU ESG Ratings Regulation (which we considered here and here) will require careful consideration for entities operating across the EU and UK. Whilst there are a number of similarities between the regimes, there will be some differences in scope and available exclusions.