FCA Consultation Paper CP25/34 – ESG (Environmental, Social, Governance) ratings: Proposed approach to regulation

By Mikkel Bates, Senior Board Adviser, FundSense

Although ESG ratings sit upstream of most investor disclosures, their methodologies have long been opaque. With this consultation, the FCA is signalling a shift toward greater transparency and governance, with consequences for every firm relying on these ratings for product disclosures, due diligence and distribution.

Since ESG disclosures were first mooted for financial firms, there have been questions around the independence and reliability of third-party ESG ratings providers (“providers” for short) and even what is considered by each provider in its ratings assessment.

On 1 December, the FCA issued CP25/34, which is an unusual consultation, as it doesn’t relate to financial firms, but to companies that provide data used by them.

What is the CP all about?

At its core, the FCA intends to bring ESG ratings providers into the regulatory perimeter, ensuring they meet baseline governance, transparency, and conflict-management standards similar to those already expected of financial firms.

The biggest shake-up will be the need for providers to be authorised by the FCA to conduct activities in the UK.  Providers will then need to act in ways that achieve good outcomes by enhancing market integrity, improving quality, and supporting consumer protection, sustainable growth, and international competitiveness.

The FCA started with the recommendations laid down by the international regulatory overseer, IOSCO, and has tailored these to its own baseline rules and standards.  The proposals are also based on the premise that the provision of ESG ratings is a B2B activity, but with implications for end investors.

It is important to note that IOSCO did not seek to enforce a “one size fits all” regime on providers.  The FCA has now taken up the recommendations and is bringing in new requirements on transparency; governance, systems and controls; stakeholder engagement; and management of conflicts of interest.

What is being proposed?

The baseline rules the FCA plans to apply to providers are in the following sourcebooks. These chapters collectively outline how the FCA expects providers to manage governance, operational resilience, conflicts of interest and market integrity:

• COND – The core conditions all authorised firms must satisfy, and which are not being consulted on.

• PRIN – These include principles such as acting with integrity; operating with skill, care, and diligence; treating customers fairly; maintaining sufficient financial resources; being open with the regulator; and others.  Providers will be subject to a separate conflicts of interest regime, while Consumer Duty won’t apply directly to providers, but they need to be aware of the obligations on other firms in the distribution chain.

• SYSC – The chapters that will apply to providers are those on robust governance, staff competence and suitability, combating financial crime, managing risks, outsourcing, and record-keeping.

• GEN – These are the day-to-day rules around how firms interpret the FCA Handbook, disclosing their regulated status, and so on.

Out of scope

Some firms already regulated by the FCA may conduct ESG ratings, and they will continue to be regulated as they are currently.  To keep the burden on firms to a minimum, they will not need to seek additional permissions under the new regime.  Examples in the CP include:

• Asset managers producing ratings to use in their own fund marketing materials;

• Investment firms producing ratings as part of their investment research;

• Benchmark administrators developing ratings for use in their index methodologies.

In a different sense, the FSCS is also out of scope, because the nature of ESG ratings is such that the FCA does not propose to extend cover to them.

These carve-outs show that the FCA is targeting entities whose ratings influence market confidence rather than internal scoring methodologies used within investment processes.

What about conflicts of interest?

The CP acknowledges that there are several ways in which conflicts of interest may arise for providers, including the possibility of upgrading companies because they are paying for the ratings, or where the provider also supplies other services, such as consulting, to the entity being rated.

Providers will be required to have robust systems and controls to identify and manage, or otherwise to disclose, potential conflicts.  Where commercial confidentiality prevents disclosure, providers will need to explain the nature of a potential conflict in sufficient detail to make it obvious and clear.

Timing

The important dates to remember are:

• 31 March 2026, the consultation closes;

• Q4 2026, FCA plans to publish its Policy Statement and Final Rules;

• June 2027, the Gateway opens for providers to apply for FCA authorisation;

• 29 June 2028, the new regime will go live.

Reducing compliance risk as the new regime lands

The proposed rules on ESG ratings providers will materially affect how asset managers source, document, and rely on sustainability data, with consequences for prospectuses, regulatory pre-contractual documents, and governance. As ESG ratings become formally regulated, firms will need clearer audit trails, more robust documentation flows, and better visibility into data lineage.

At FundSense, we help firms document, govern, and automate product data in a way that reduces dependency risks and strengthens regulatory control. Our platform helps asset managers transition from manual, disconnected processes to consistent, automated, auditable workflows, supporting compliance as the new regime takes shape.

Contact us to see how FundSense can reduce your compliance risk and operational pain as the new regime lands.

About Mikkel Bates, Senior Board Adviser, FundSense

Mikkel brings to FundSense over 40 years of experience in UK and European financial services marketing and regulatory disclosures, at a range of companies from start-ups to leaders in their fields.  He has also worked with several industry trade bodies to ensure a consistent approach to regulatory interpretation and to promote constructive interaction between industry practitioners, solution providers and regulators.