UK Government updates on ESG ratings providers and UK Taxonomy

What does this mean?

The The updates were published as part of the proposed policy package following the 2024 UK Mansion House Speech delivered on 14 November. The key points of each consultation are set out below.

ESG Ratings Providers

The Government published draft legislation for a regime to bring the provision of ESG ratings into regulation. The SI sets out the proposed scope, the definition of an ESG rating, and what activities have been excluded. These are summarised below:

Scope: the regime will affect firms that provide ESG ratings, including standalone ESG ratings and ESG ratings as part of an existing regulated activity. Firms in the UK and overseas that provide ESG ratings to UK users would be in scope. 

ESG rating definition: an ESG rating must make an assessment of one or more ESG factors (e.g. an ESG opinion or ESG score). The regime will capture ESG ratings which are “likely to influence” a decision to make a specified investment, such as informing asset allocation or pre-initial public offerings ratings. 

Proposed exclusions: there are certain use cases where ESG ratings would be excluded from the requirements, including:

• “Regulated products and services” where an ESG rating is created as part of the developments / delivery of another regulated activity (e.g. credit ratings, benchmarks).

• Ancillary non-commercial provision (e.g. non-commercial activities undertaken as an integral part of academia, journalism, and charity).

• Ratings for internal use (e.g. internal ratings, intra-group ratings, bespoke/private ratings)

• Accreditation or certification (e.g. EPC ratings).

• Public authorities, central banks, and international organisations.

Other exclusions include providing ESG data and distributing ESG ratings. While ESG data provision is excluded, this market will be monitored for potential future regulatory intervention.

UK Green Taxonomy 

The UK Government wants the UK to be the world leader in sustainable finance and is progressing a wider sustainable finance policy framework. This includes, for example, the FCA’s sustainability disclosure requirements and fund labelling regime and commitments to introduce disclosures aligned to International Sustainability Standards Board standards.

Against this policy backdrop, the Government is considering whether to take forward the UK Taxonomy and is seeking views on the value case for doing so. Two key areas are highlighted for discussion, which are summarised below.

Use cases: The Government asks about specific use cases where the UK taxonomy would contribute to the Government’s sustainable growth goals and support transition finance. Views are also requested on how to evaluate the UK Taxonomy’s success. The CP also notes the work previously undertaken by the Green Technical Advisory Group (GTAG) in identifying potential use cases, such as:

• “acting as an input to project and business finance decisions, providing consistent standards to allow meaningful comparisons over time” or

• “informing the development of sustainability-focused financial products” or 

• “supporting investor stewardship and engagement”.

Design features: the CP focuses on how to make the UK Taxonomy as usable as possible, noting the importance of international interoperability. The GTAG previously made recommendations regarding interoperability. The CP asks for views on how the UK should approach key design elements, such as:

• environmental objectives - what to include, sectoral scope, how to prioritise

• the ‘Do No Significant Harm’ principle - balancing user friendliness with environmental robustness

• business practice safeguards - whether these should be included given existing UK requirements regarding human rights abuses and labour exploitation

• governance and oversight - what level is needed to ensure the Taxonomy’s credibility is maintained over time 

• how frequently to make updates over time.

What do firms need to do?

The ESG Ratings SI sets out the framework, but not the detail of what the requirements will look like. This will come from the FCA in due course. Authorised firms performing in-scope activities will need to ensure they have the right permissions. Firms not already authorised but likely to be captured should start preparing for authorisation, as this can be a lengthy process. Firms should take advice to ensure they apply for all necessary permissions. 

The UK voluntary Code of Conduct for ESG ratings and data products providers has both Government and FCA support, suggesting it may inform future rules. Firms should begin assessing the potential impact of the FCA’s future regime by performing a gap assessment against the Code to identify potential weaknesses.  

Firms should engage with the UK Taxonomy CP, consider the previous recommendations of the GTAG, and feed back their views to the Government on the value case for a UK Taxonomy. 

The timeline for the UK Taxonomy’s next steps is unclear, though the Government has reinforced the importance of interoperability. Firms which are in scope of the EU Taxonomy should not delay work to comply with its requirements while waiting to see what decision the UK Government takes regarding a UK taxonomy. 

Next steps

The consultation on the ESG ratings SI is open until 14 January 2025, with the final legislation expected later in 2025.  The FCA will subsequently consult on specific regulatory requirements for ESG ratings providers.  

The UK Green Taxonomy consultation closes on 6 February 2025.