The time of ESG ratings as an informal reference has officially ended.
In 2026, ESG rating will cease to occupy a regulatory grey zone, quietly influencing investment decisions without regular control, transparency, or accountability. Instead, they will be regulated market instruments under scrutiny by regulators and subject to the same standards as credit rating agencies” → “subject to a comparable level of regulatory scrutiny as credit rating agencies, though under a distinct, dedicated regime.
To financial institutions, this is not a cosmetic change. It represents a paradigm shift in the way the sustainability risk, impact, and long-term value are measured, regulated, and integrated into the capital markets. The new ESG Ratings Regulation being introduced in major jurisdictions is an indicator of a new reality: ESG data and ratings are now systemically relevant to financial stability and protection of investors.
This article deconstructs the meaning of ESG ratings regulation in practice, how the EU ESG ratings regulation and UK ESG ratings regulation are making an impact, and what investors and companies need to do to stay on top as 2026 looms.
What Are ESG Ratings — And Why Regulation Became Inevitable
ESG ratings determine how businesses cope with environmental, social, and governance risks and opportunities. They have an impact on the creation of portfolios and capital allocation, on the labelling of products, on the reporting of regulations and stewardship policies.
However, ESG ratings have long been characterized by:
- Poor transparency in methodologies.
- Inequality in scoring among providers.
- Rating and advisory conflicts of interest.
- Poor accountability systems.
Two firms with the same ESG profile might score far apart with various providers—it will not bring clarity to investors.
When ESG data found its way into financial regulation (CSRD, Sustainable Finance Disclosure Regulation (SFDR), EU Taxonomy), regulators realised that a tension was building up: sustainability reporting was becoming highly regulated, but the ratings that explained that reporting were largely unregulated.
The answer to this imbalance is the ESG Ratings Regulation. It is not aimed at standardising opinions, but providing transparency, integrity, and a comparison of ESG rating activities.
EU ESG Ratings Regulation: A New Supervisory Framework
The European Union has struck—and struck decisively.
Formally adopted in 2024, the EU ESG ratings regulation has created a binding regulatory framework for providers of ESG ratings to the EU market or targeting the EU market. It entered into force on 2 January 2025 and will apply from 2 July 2026, and it will be controlled by the European Securities and Markets Authority (ESMA).1
Key pillars of the EU ESG ratings regulation
1. Mandatory authorisation and supervision
ESG rating providers are required to be registered with ESMA and to meet supervisory requirements that will be ongoing. This brings in regulatory responsibility akin to that of credit rating agencies.
2. Transparency of methodologies and data sources
The providers should make clear disclosures:
- Rating objectives and scope.
- Weighting logic and methodologies.
- Sources of data and methods of estimation.
This enables the financial institutions to have a better idea of the construction of the ESG ratings and the interpretation of the scores.
3. Conflict-of-interest management
Providers should not confuse ESG ratings with consulting or advisory services that may violate independence, directly resolving longstanding market concerns.
4. Provisions for third-country providers
Non-EU ESG rating agencies are allowed to carry on with their operations in Europe through equivalence, recognition, or endorsement, which ensures continuity in the markets globally.
To investors, this regulation goes a long way to increase the reliability and auditability of ESG ratings as they are used in investment decisions, risk models, and regulatory reporting.
UK ESG Ratings Regulation: A Principles-Based Approach
Although they have a similar purpose, the UK ESG rating regulation is following a somewhat different path.
The UK Financial Conduct Authority (FCA) has suggested a regulatory framework based on the IOSCO principles with a view to governance, transparency, and resilience in operations as opposed to prescriptive standardisation.
What the UK framework focuses on
- Accountability and governance structures.
- Openness of techniques and suppositions.
- Conflict of interest management.
- Effective communication of rating restrictions
In contrast to the EU, the UK is focusing on flexibility, which enables innovation, enhancing trust in ESG ratings. Final FCA rules are expected in late 2026, with ESG ratings becoming a regulated activity from 29 June 2028, followed by a transition period into 2029..2
This presents a dual-regulatory space to the global financial institutions, where ESG data governance needs to be carefully aligned across jurisdictions.
Why ESG Ratings Regulation Matters to Financial Institutions
To banks, asset managers, insurers, and asset owners, ESG Ratings Regulation is not merely a compliance matter, but also it is a strategy matter.
1. Stronger investment decision-making
Controlled ESG ratings enhance trust in sustainability indicators employed in:
- Portfolio risk assessment
- ESG integration strategies
- Climate stress testing
- Sustainable product development
2. Better regulatory alignment
As ESG ratings become more informative:
- SFDR classifications
- Prudential risk frameworks
- Stewardship obligations
Controlled ratings minimize the legal and reputational risk of having untrustworthy data sources.
3. Enhanced due diligence
Financial institutions will be looking forward to not only knowing the ESG scores, but also how they were determined. Regulation aids stricter due diligence and governance of vendors.
Operational Impact: What Changes Inside Institutions
The regulation of ESG ratings will prompt financial institutions to change their operations.
Tightening Vendor Governance
Institutions will need to:
- Determine the authorisation of ESG rating providers.
- Learn about differences in methodology.
- Record the use of ratings internally.
Evolution of ESG Data Strategies
Instead, they can use a single ESG score, which means that they:
- Integrate various controlled ESG results.
- Corporate internal materiality tests.
- Take ESG ratings as inputs, but not the final word.
Strengthening Product Governance
The need to trace and defend a source of ESG data will only grow as sustainable finance products become more popular and greenwashing becomes a stronger enforcement mechanism.
Challenges and Trade-Offs in ESG Ratings Regulation
Although it is needed, the regulation of ESG ratings adds complexity.
- Transparency vs proprietary innovation : The providers should strike a balance between being open and protecting intellectual property.
- Comparability vs diversity of opinion : Regulation enhances transparency but does not remove divergent ESG opinions- nor should it.
- Cross-border alignment : International organizations will have to deal with regulatory fragmentation of the EU, UK, and additional jurisdictions. In the case of financial institutions, a perfect ESG score is not the goal, but rather the development of strong structures to decode and situate regulated ESG ratings.
How ESG Ratings Regulation Will Shape the Market Beyond 2026
In the future, ESG ratings regulation can be expected to grow in scale.
Market participants widely expect:
- Increased integration of EU and UK systems.
- Climate transition and impact-related ratings’ integration.
- Increased connection between ESG ratings and prudential supervision.
- Greater technological and AI utilization in a tighter regulation regime.
Regulated ESG ratings, over time, will be created as an infrastructure of sustainable finance, just as credit ratings are now.
Strategic Takeaways for Investors and Companies
With the year 2026 in sight, there is no use denying the fact that ESG ratings have ceased being optional, informal tools, and are now governed market instruments.
In the case of financial institutions, the priority measures are:
- Review ESG rating providers and regulatory readiness.
- Strengthen internal ESG data governance.
- Train investment and risk teams to interpret regulated ESG ratings effectively.
- Align sustainability strategies with evolving regulatory expectations.
ESG Ratings Regulation is not about limiting judgment—it is about making judgment more transparent, accountable, and trustworthy.
Those who adapt early will not only reduce regulatory risk but also gain a strategic advantage in a market where sustainability credibility increasingly defines long-term value.
FAQs
1. What is ESG Ratings Regulation and why is it being introduced?
ESG Ratings Regulation refers to new legal frameworks governing how ESG ratings are developed, disclosed, and supervised. It aims to improve transparency, reduce conflicts of interest, and increase trust in ESG ratings used by investors and financial institutions.
2. When will ESG Ratings Regulation come into effect in major markets?
The EU ESG Ratings Regulation will apply from 2026, while the UK ESG ratings regulation is expected to be implemented shortly after. These timelines give ESG rating providers and financial institutions time to adapt governance and compliance processes.
3. How does ESG Ratings Regulation impact investors and asset managers?
ESG Ratings Regulation affects how investors select, assess, and rely on ESG ratings. It requires stronger due diligence on rating providers, better understanding of methodologies, and more robust governance around ESG data used in investment decisions.
4. Does ESG Ratings Regulation standardise ESG scores across providers?
No, ESG Ratings Regulation does not standardise ESG scores or opinions. Instead, it ensures transparency, accountability, and oversight, allowing investors to better interpret differences between ESG ratings while preserving methodological diversity.
5. What should financial institutions do to prepare for ESG Ratings Regulation?
Financial institutions should review their ESG rating providers, strengthen ESG data governance, document how ESG ratings are used internally, and ensure alignment with upcoming EU and UK ESG ratings regulation requirements before 2026.
