UK to Regulate ESG Rating Providers in 2025, Boosting Sustainable Finance
Britain plans to introduce legislation in 2025 to regulate ESG rating providers, aiming to enhance transparency and solidify its position as a leader in sustainable finance. This move aligns with global efforts to combat greenwashing.
In a significant move towards enhancing transparency in sustainable finance, the United Kingdom has announced plans to introduce legislation regulating Environmental, Social, and Governance (ESG) rating providers in 2025. This decision, revealed on August 8, 2024, marks a shift from the current voluntary code of conduct to mandatory rules, aligning with similar regulations already implemented in the European Union.
Rachel Reeves, the UK Finance Minister, has instructed the Treasury to swiftly respond to an industry consultation on the new regulatory regime. The proposed legislation aims to address the lack of transparency in ESG ratings, which play a crucial role in directing billions of dollars into sustainability-focused investment funds.
"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."
The UK Sustainable Investment and Finance Association (UKSIF) has welcomed this move, stating that regulation could help open a "black box" of ESG ratings. Currently, providers sometimes produce vastly different ratings for the same company, causing confusion among investors.
This regulatory initiative is part of a broader global trend towards standardizing ESG practices. The concept of ESG was first coined in 2004 in a UN Global Compact report, and since then, ESG investing has grown exponentially. It is estimated that ESG investments will exceed $50 trillion in assets under management by 2025.
The proposed UK law will align with recommendations from the International Organisation of Securities Commissions (IOSCO), founded in 1983 and regulating 95% of the world's securities markets. This alignment ensures consistency with international standards and practices.
Major ESG rating providers, including S&P Global, Moody's, MSCI, London Stock Exchange Group, and Morningstar's Sustainalytics, will be affected by this new regulation. These companies have been at the forefront of ESG ratings, with MSCI launching the first ESG index in 1990.
The move towards regulation is also a response to growing concerns about greenwashing, a term coined by environmentalist Jay Westerveld in 1986. Regulators worldwide have been stepping up efforts to combat this practice, where companies inflate their green credentials to attract investment.
This regulatory push is part of a larger sustainable finance ecosystem. The world's first green bond was issued by the World Bank in 2008, and initiatives like the UN Principles for Responsible Investment (2006) and the Task Force on Climate-related Financial Disclosures (2015) have further shaped the landscape.
As the UK moves forward with this legislation, it joins a global movement towards more transparent and standardized ESG practices, contributing to the broader goals outlined in the UN Sustainable Development Goals adopted in 2015.
