Chancellor of the Exchequer Rachel Reeves has stated her intention to implement binding regulations for firms providing environmental, social and governance (ESG) performance ratings to businesses.
An initial public consultation into a future regulatory regime for ESG rating providers was launched under the previous Conservative government between March and June of last year, but as yet, no action has been taken as a result.
A statement from the HM Treasury released on Thursday notes: “Rachel Reeves has asked the Treasury to respond quickly to an industry consultation on a new regulatory regime for ESG rating providers and bring forward legislation next year.”
Currently, firms who provide ratings on businesses’ ESG performance – and thus have the power to allow firms to access sustainability-focused investment funds – are asked to comply with a voluntary code of conduct. However, the voluntary nature of this approach leaves the system vulnerable to bad actors and greenwashing.
Meanwhile, ESG raters operating in the EU are subject to mandatory standards and regulations.
The ministry states that any future legislation would be in accordance with recommendations from the International Organisation for Securities Commissions, which published a 2022 report outlining how the ESG rating sector should be regulated.
Current reports suggest that new legislation would require ESG rating providers to be supervised by the Financial Conduct Authority (FCS), the body which regulates banks, investors, and financial services providers.
With green investment seeing major rises — UK financial institutes tripled their annual clean energy investment in 2023 — transparent assessment of financial institutions’ ESG performance is increasingly vital, spotlighting the importance of ensuring that those performing ESG ratings are acting in the best interests of the environment and the public.
New Chancellor brings major shakeups to energy finance
Since her appointment as Chancellor of the Exchequer, Rachel Reeves has made several announcements that have shaken the energy sector.
Mere days after taking office, Reeves, alongside Business Secretary Jonathan Reynolds, instructed officials to bring the UK Infrastructure Bank and the British Business Bank together into a new National Wealth Fund to facilitate investment into green economies. As part of this, £7.3 billion was immediately made available for green investments.
In late July, Reeves announced that the Energy Profits Levy (EPL) – a windfall tax on profits from oil and gas production – would be increased from 35% to 38%.
