by Jonathan Eida, researcher
The state should be doing less, not more. The government must refocus on deregulation, not regulatory expansion. Businesses are already weighed down by a complex web of compliance. This burden creates a mountain of costs due to the vast amount of time and resources consumed just to meet current regulatory obligations.
The government’s decision to bring ESG (Environmental, Social and Governance) ratings providers within the regulatory remit of the Financial Conduct Authority (FCA) marks a major shift in how financial markets approach sustainability data. With the global ESG market projected to exceed $40 trillion by 2030, ESG ratings have become a feature of modern investment decision-making which influences capital allocation and corporate behaviour.
This move significantly increases the remit of the FCA. Until now the FCA has had responsibility over financial firms, but this move sees this extended to firms that are by association attached to financial firms.
The reason this is being instituted into law, according to the government, is that ESG ratings increasingly determine how investors assess companies’ ethical and environmental credentials, yet the methodologies behind those scores vary widely. Two providers can deliver vastly different assessments of the same firm, confusing investors and undermining confidence in the entire ESG ecosystem. The report argues that there have been several cases where providers have been criticised for offering consultancy services to the very companies they rate and advising them on how to improve the scores they themselves produce. This dual role arguably risks creating an inherent conflict of interest and undermines market trust.
By bringing these ratings providers within the FCA’s regulatory perimeter, the government aims to boost investor confidence and enhance transparency. The move is designed to align the UK with international standards such as those developed by the International Organization of Securities Commissions (IOSCO). The regulation is also intended to create a level playing field between data providers and investment firms, both of which play roles in shaping sustainable finance.
Support for regulatory change was strikingly high. According to HM Treasury’s consultation, 95 per cent of respondents backed the proposal to introduce FCA oversight, citing the need to tackle “perceived harms” in the market. Respondents overwhelmingly endorsed stronger requirements on transparency of methodologies and on managing conflicts of interest particularly the practice of providers offering advisory services to the same companies they rate. Seemingly, for many in the financial sector, statutory regulation represents a necessary step to improve the ESG ratings industry and ensure that the information guiding trillions of pounds of investment decisions can be trusted.
However, while the headline support appears overwhelming, the underlying responses reveal deep concern among industry participants about the economic and operational costs of this new regime. Of the 32 responses HM Treasury received, 63 per cent of organisations anticipated that regulation would have some impact on their business and 65 per cent of those expected that impact to be significant or severe. Many warned that FCA authorisation and ongoing compliance costs including legal, reporting, and resourcing obligations would be substantial and could stifle innovation. Smaller ESG ratings firms, in particular, feared being squeezed out by higher regulatory barriers, leading to reduced competition and a consolidation of market power among large, established providers.
Roughly a fifth of respondents expressed concern that, while aiming for transparency, the government could inadvertently harm the market by forcing excessive disclosure requirements that compromise proprietary methodologies, the intellectual property on which ESG businesses are built.
What this reveals is that while regulation enjoys superficial support, the reality of being regulated tells a very different story. Firms fear the soaring compliance costs and anti-competitive effects that favour established players over market disruptors. A 2025 SteelEye report found that 40 per cent of UK firms cited reputational risk as the main driver of rising compliance costs showing how the culture of compliance is fueling additional regulation. Regulation may add respectability in theory, but in practice it often stifles innovation, entrenches incumbents and drives up costs.
This move expands the state’s reach into financial services, piling new burdens onto firms including many not directly involved in the sector. While business groups may publicly endorse it, the reality is that it will slow growth, stifle innovation and squeeze out smaller players. The pattern is familiar across industries, more regulation, less competition. Instead of tightening the regulatory net, the government should be cutting red tape, not weaving more of it.