HM Treasury consults on regulating ESG ratings providers

HM Treasury has launched a consultation setting out proposals on the scope for a potential regulatory regime for ESG ratings providers.

In light of industry concerns, HM Treasury recognises that growing reliance on unregulated ESG ratings, particularly in investment decisions, can increase risks. HM Treasury considers there is a clear benefit to improve the transparency of methodologies, governance, and processes of ESG ratings providers.

The core policy proposal is to bring into the scope of regulation: “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”.

However, HM Treasury also note that other activities may also be brought into regulation, including some cases of indirect provision of these assessments, and where these assessments are used in relation to certain things other than RAO specified investments. A key clarification of the core proposal is also that it does not matter how a product is labelled (i.e. whether it is presented as an ESG rating or not), and they have taken a deliberately broad approach to just saying it could be in relation to E, S or G.

HM Treasury’s proposed approach to capturing ESG ratings in regulation is by including a new regulated activity within the RAO. HM Treasury proposes that the new regulated activity would cover providing an ESG rating to be used by persons in the UK in relation to an RAO specified investment. However, there are ESG ratings of other things which may not be specified investments, such as some voluntary carbon credits. So, HM Treasury will consider how these should be accounted for.

Exclusions

Not-for-profit entities, such as a UK registered charity, would be excluded, as well as ratings produced by an entity solely for internal use, such as asset managers who may create their own ratings for internal use to make investment decisions. However, if firms use these ratings for both internal use as well as selling on these ratings as a standalone product or part of a bundle, the ratings will not be exempt.

There are other related activities which HM Treasury considers could also be excluded from the regulated activity. That is because they can be conceived of as distinct from the provision of an ESG rating and therefore a different approach to them is warranted.

The consultation closes on 30 June 2023.

Read our summary note on our Knowledge Portal for more.