Global: UK Government Proposes New Regulations for ESG Ratings Providers to Ensure Accuracy and Transparency

The UK government has released a consultation paper on the introduction of regulations for providers of environmental, social, and governance (ESG) ratings. The paper details the proposed regulatory regime, which seeks to ensure that ESG ratings providers meet appropriate standards and do not mislead investors through inaccurate or incomplete information. The proposed activity subject to regulation includes the direct provision of an assessment of ESG factors to a user in the UK, where the assessment is used in relation to a specified investment in the RAO, unless an exclusion applies.

The regulation’s scope is considered to be broad, potentially capturing ESG rating and data providers, including ESG consultancy or service providers. The proposed regulatory regime is expected to be more onerous than the current regime for benchmark administrators or credit rating agencies. There are concerns that smaller ESG ratings providers may be disproportionately affected by the regulation and find it harder to compete with larger providers.

Lorraine Johnston, Financial Regulatory Partner at law firm Ashurst said:

“Regulation of data providers has been trailed for a while, we’ve known that it was coming since early last year, but today’s publication provides the significant detail.

Importantly the net has been cast wide. Very wide. The new activity is set out as: ‘the direct provision of an assessment of environmental, social, or governance factors to a user in the UK, where the assessment is used in relation to a specified investment in the RAO, unless an exclusion applies’. This will capture ESG rating and data providers. Those entities who see themselves as ESG consultancy or service providers will now be in scope.

This is important because it is arguably a more onerous regime than the more limited scope for benchmark administrators or credit rating agencies.

Expect significant pushback. And possibly rightly so.”

Dave Rome, Strategic Director of Corporate Lending at law firm Ashurst said:

”A degree of regulation might be useful in creating a transparent and level playing field, possibly leading to less debate around greenwashing. That being said, this has to put in place as soon as possible, co-ordinated across jurisdictions including the EU and USA and focused on supporting green or sustainability linked financing rather than providing the finance industry with another opportunity to procrastinate or debate the validity of transition finance be it light or dark green. We don’t have the time for such continual debate” 

Lee Doyle, Partner and Global Co-Chair of Bank Industry at law firm Ashurst said:

“Regulating such a systemic matter is essential – but global (and at a minimum European) co-ordination will be needed for the true value to be attained.”