UK moves to regulate ESG ratings: legislation finalised

The UK Government has taken forward earlier proposals to regulate ESG ratings in the UK. It has laid before Parliament the Financial Services and Markets Act 2000 (Regulated Activities) (ESG Ratings) Order 2025 (the Order), accompanied by an Explanatory Memorandum. The FCA has simultaneously welcomed the legislation and signalled that it will consult on detailed rules and guidance before year‑end.

The Order is a significant step towards the UK developing a fully fledged regime for the regulation of ESG ratings in the UK. This will be of interest to ESG rating providers, but also other types of firms that may find themselves producing ESG analysis, scores or metrics that could constitute an ESG rating, even when they are not explicitly positioned as a rating.

What is regulated?

The Order amends the Regulated Activities Order to specify “providing an ESG rating” as a regulated activity where the rating is likely to influence a decision to make a specified investment.

An ESG rating is defined as an assessment regarding one or more environmental, social or governance factors, prepared using an established methodology and a defined ranking system of rating categories, and delivered as an opinion, a score, or a combination of both. A firm “provides” an ESG rating only where it both produces the rating and makes it available.

The Order also provides some explicit examples of what is included in the concept of a “rating category”, including “a variable or division within a system, such as a letter, number, symbol, colour or temperature, that provides a relative measure to distinguish one or more characteristics of various rated items”. But these examples are not exhaustive.

As a result, the activity only applies where there is some sort of structured assessment relating to E, S or G factors, with an output indicating a relative measure, which is likely to be used in investment decisions.

This is strikingly similar to the scope of the EU ESG Ratings Regulation (for more detail on its scope, see our client note here) but with important differences:

• the UK concept means the provision of ESG ratings is only regulated where it is likely to influence investment decisions – there is no such limitation in the EU; and
• the UK activity only applies where a firm both produces and distributes a rating – hence carving out pure distribution in a clearer way than in the EU.

Are non-UK firms caught?

As well as applying to UK‑located providers delivering ratings to any client globally, the regulated activity also captures overseas providers where ratings are made available to UK customers. There is a limited exemption for overseas providers that makes ratings available to UK persons without remuneration – but this is clearly unlikely to be helpful for firms producing ESG ratings as part of a business. This is again similar to the EU ESG Ratings Regulation, which also applies to certain overseas providers, although the precise scope of when overseas providers are caught is different.

What about exclusions?

To calibrate the perimeter and minimise double regulation, the Order includes a significant number of exclusions. These cover, among others, ESG ratings:

• Provided in the course of another FCA‑regulated activity, or under specified market access arrangements, or in the context of recognised schemes or AIFs marketed under defined regimes, provided the ESG rating is not offered as a standalone service.
• Used to produce, or incorporated into, credit ratings or credit‑scoring systems that are excluded from the UK Credit Rating Agencies Regulation, or provided in the course of administering benchmarks that fall outside the UK Benchmarks Regulation scope.
• Provided intra‑group where there is no reasonable expectation of external availability, or provided for private use under a contract relating solely to the client without external availability.
• Produced solely to comply with a legal or regulatory requirement binding on the provider.
• Developed exclusively for accreditation or certification processes whose purpose is not to influence investment decisions.
• Provided as part of proxy advisory services.
• Provided by journalists, academics or charities where there is no relevant remuneration in connection with the rating, or where provision is occasional/one‑off and not maintained for ongoing reliance.

Public authorities, central banks and international organisations are also excluded.

The exemption that is likely to be of most interest to financial services firms is the one for ESG ratings provided in the course of another FCA-regulated activity / specified market access arrangement (which includes the overseas persons exclusion). This provides a broad carve out for items that could be considered ESG ratings – like scores disclosed in advice, ESG metrics used in portfolio management services, ESG information in fund marketing disclosures etc. However, there are some potential gaps, where a firm could provide a broader financial service and an ESG rating without benefitting from this exclusion. For example, where a firm is relying on an exclusion from broader regulation, or where an overseas firm is interfacing with UK persons relying on its regulated activities not occurring in the UK (rather than the overseas persons exclusion).

Timing, transitional arrangements and FCA next steps

The Order takes effect in two stages. On the initial commencement, the FCA and the Financial Ombudsman Service are empowered to make or consult on rules and guidance and to accept and determine authorisation and variation applications for the new activity. The main commencement day, when the authorisation requirement will apply, is set for 29 June 2028.

The Order provides savings and transitional arrangements to manage applications and continuity (effectively enabling the FCA to manage the transition to authorisation and regulation in a managed manner).

Concurrently with the legislation being laid, the FCA has indicated it will consult before year‑end on rules aligned to IOSCO recommendations, focusing on transparency, governance, systems and controls, and conflicts of interest. The FCA will also publish guidance to help firms assess whether their activities fall within scope and require authorisation.

Practical considerations and next steps

The Order is mainly aimed at firms who consciously produce “ESG ratings” as part of their business. Such firms will need to start scoping their activities, and preparing for authorisation in the UK.

However, other firms can potentially be impacted where they produce ESG analyses, scores, metrics etc. that could inadvertently fall within the scope of an “ESG rating”. For example – an asset manager which assigns “ESG impact” scores to investments, an insurer that assigns “climate risk exposure” scores to companies, or an investment bank which conducts ESG risk assessments on issuers as part of research. These may all be producing “ESG ratings” in principle. Hence, where these firms do not wish to be authorised as ESG rating providers, other aspects of scoping, such as whether these are provided as part of a broader regulated service, and whether they are likely to influence investment decisions, will be key.

Firms could begin their readiness work now, with the key initial steps being:

• Scoping and perimeter assessment. Map all ESG ratings products and services (including scores, metrics, analyses and other products not badged as “ratings”) against the statutory definition, focusing on established methodologies, defined ranking systems and the likelihood of influencing specified investment decisions. Confirm whether you “produce and make available” ratings or act solely as a distributor. For cross‑border models, assess whether ratings are, directly or indirectly, made available to UK persons and whether any “free of remuneration” exclusion could apply in practice.
• Exclusions and overlaps. Test applicability of exclusions for regulated activities, benchmarks, credit ratings, intra‑group and private‑use scenarios, proxy advice, accreditation/certification and mandatory regulatory outputs.
• Global alignment. For groups operating in multiple jurisdictions, align UK preparations with preparation for the EU ESG Ratings Regulation – given the similarities in scope and extra-territorial application of both regimes. However, noting that the scope and exemptions/exclusions are not exactly the same in both. So firms may need to calibrate their approach carefully.

Firms will need to work towards the ultimate implementation date of 29 June 2028 (when the Order fully applies), and in the meantime keep an eye out for the FCA rules and guidance due to be consulted on later this year.