The UK is set to introduce a new law to regulate (Environmental, Social, and Governance) ESG rating agencies, aiming to increase transparency in the sector. Announced by Chancellor Rachel Reeves, the bill will align UK legislation with global standards, particularly those of the EU. The move addresses concerns about the opaque criteria used by these agencies, which influence investment decisions across trillions of pounds. The Financial Conduct Authority will oversee the new regulations.
Reeves, on a visit to Toronto, said: “We are forging a new partnership with industry to get finance to the best, most innovative and most sustainable companies so that we can unleash Britain’s potential.”
At present there is little oversight on how organisations create ESG criteria and rate other companies against them. The ratings influence which stocks and bonds make it into investment funds that are marketed as sustainable.
Reeves has decided that the Financial Conduct Authority, the top financial regulator, will set the rules of the new regime; there had been suggestions a new watchdog might be created to administer the regime. To avoid new burdens on business, the UK regime will mirror international recommendations and the system being created by the EU.
Lorraine Johnston, head of ESG regulation at law firm Ashurst, said the consultation on the new regime had closed in June 2023 and the industry “desperately needs clarification” on the proposals because of requirements introduced last week for UK funds to make disclosures about their sustainability.
Key Points:
- New UK law to regulate ESG rating agencies.
- Increase transparency in the sustainable finance sector.
- Legislation aligns with EU and international standards.
- Financial Conduct Authority to oversee the regime.
- Concerns about opaque criteria and impact on UK defence companies.