On 14 November 2024, HM Treasury (HMT) published its response document to its earlier consultation on the future regulatory regime for Environmental, Social and Governance (ESG) ratings providers.

Earlier consultation

Previously HMT issued a consultation on the regulation of ESG ratings providers on 30 March 2023, and this closed on 30 June 2023. It sought views on:

  • The introduction of regulation for ESG ratings providers.
  • Description of ESG ratings and their provision.
  • Activities to exclude from regulation.
  • Sectoral and territorial scope of regulation.
  • Making regulation proportionate.

Policy

The response document now published summarises the views received to the consultation and sets out HMT’s response.

Among other things the response document provides that:

  • The definition of an ESG rating for the purposes of the regulatory regime has been developed as: “an assessment regarding one or more ESG factors, produced in the form of an ESG opinion, an ESG score or a combination of both, whether or not it is characterised as an ESG rating”.
  • An ESG opinion is defined as “an ESG rating involving substantial analytical input from an analyst, whether or not it is characterised as an ESG opinion”.
  • An ESG score is defined as “an ESG rating derived from data and a pre-established statistical or algorithmic system or model, without additional substantial analytical input from an analyst, whether or not it is characterised as an ESG score”.
  • The scope of the regulation is designed to capture:
    • UK firms providing ESG ratings to UK users by any means – this applies whether provided by way of a business relationship (paid for by the user, either on its own or as part of another service or bundle of products) or provided for free to users.
    • Overseas firms providing ESG ratings to UK users by way of a business relationship (paid for by the user in the UK, either on its own or as part of another service or bundle of products). The reference to a business relationship means that for overseas ESG ratings providers, paid-for ratings and ratings that are provided as part of a broader commercial arrangement will be in scope, whether by a subscription model or any other contractual relationship, including as part of a bundle of products or services, to a person located in the UK.
    • The provision of ESG ratings to non-UK users by UK firms. This was not proposed in the initial consultation but is designed to support confidence in the UK’s growing ESG ratings sector, and to provide clarity to all market participants whether in the UK or outside.

Draft statutory instrument

HMT has also published a draft statutory instrument, The Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) (No. 2) Order 2024 which frames how the regulatory perimeter for ESG ratings provision will be established including specific exclusions to address primary risks of harm (a discussion regarding the exclusions is also set out in the response document).

HMT welcomes technical comments on the draft statutory instrument by 14 January 2025.