Protections will be key in the government’s plans to introduce legislation to regulate ESG ratings providers, rather than prescriptive and standardised ratings, according to Charles Stanley.

Chancellor, Rachel Reeves, announced last week that the government intends to continue the work of the previous government and regulate agencies that assess companies’ ESG performances.

It is expected that the Financial Conduct Authority (FCA) will set out the rules, taking influence from international regulations.

The government is aiming to increase transparency in the sustainable ratings industry with the introduction of regulations, with the legislation expected in 2025.

Charles Stanley head of responsible investment, Paris Jordan, welcomed the announcement that the UK is to introduce a bill to regulate ESG rating agencies, with the firm “keen to see” a drive to increase the transparency of the sector.

“The focus on ensuring users are well-informed and understand the criteria used in the ratings process is a key area that needs improving,” Jordan stated.

“Condensing multiple factors into a singular rating has oversimplified a highly complex process, has been reductive and has led to well-intended but inadvertent miscommunications with clients. Ensuring sensible usage of the ratings will be key.”

While Jordan acknowledged that ratings play a key role in the sustainable finance industry, she noted that it was still an evolving industry and ‘guardrails’ should be in place to protect consumers.

Ensuring that users understand that ratings are an outcome of fundamental assessments, and ultimately opinions of analysts, rather than external oversight standards will be crucial to the proposed review/regulation, she added.

"Protections are key here rather than prescription: standardisation of ratings is not something we encourage as active decision making is essential within the sustainable space,” Jordan continued.

“Any proposed standardisation should be limited to the raw data provision and encouraging the adoption of ISSB, rather than restricting healthy competitive analysis.

“The government will also need to consider how any of these regulations work alongside the new SDR labels, ensuring they are complementary rather than opposing."

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