Category: ESG fundamentals · Reviewed by Jake Leat, Associate Director · Last reviewed 2026-06-10
ESG ratings are third-party assessments expressing an organisation’s exposure to, and management of, environmental, social and governance risks, typically published on a letter or numeric scale by specialist data providers. In the United Kingdom, ESG rating providers are moving into the scope of a forthcoming FCA regulatory regime following HM Treasury’s consultation response of November 2023.
Category: ESG fundamentals Also known as: sustainability ratings, ESG scores, ESG risk ratings Established / Date: Concept developed late 1990s; UK regulatory regime announced November 2023 Related concepts: MSCI ESG ratings, Sustainalytics ESG ratings, S&P Global ESG
An ESG rating is a structured opinion produced by a specialist data and analytics firm summarising the rated entity’s ESG profile. Methodologies vary materially between providers, but generally combine publicly disclosed information (annual reports, sustainability disclosures, regulatory filings), media monitoring, NGO reports and sometimes direct corporate engagement. The output may be a letter grade (e.g. MSCI’s AAA to CCC scale), a numeric risk score (e.g. Sustainalytics’ ESG Risk Ratings expressed as a number where higher is worse) or a relative percentile.
There are two principal conceptual approaches. Single-materiality ratings assess the impact of ESG factors on the rated entity’s financial performance. Double-materiality ratings additionally assess the entity’s impact on the environment and society. The choice of approach significantly affects scores and explains the well-documented low correlation (typically 0.4–0.6) between major providers’ ratings for the same company [1].
ESG ratings are conceptually distinct from credit ratings, although some agencies (Moody’s, S&P Global, Fitch) operate ESG businesses alongside their credit operations.
ESG rating providers historically operated outside the perimeter of UK financial services regulation. This is changing. HM Treasury published its consultation on the future regulatory regime for ESG ratings providers in March 2023, with a response published November 2023 confirming the intention to bring the activity within the Financial Services and Markets Act 2000 regulated activities order [2]. Draft secondary legislation was published for consultation in November 2024 and is expected to take effect in 2026, with the FCA designated as supervisor.
In parallel, the EU adopted Regulation (EU) 2024/3005 on the transparency and integrity of ESG rating activities in November 2024, applicable from 2 July 2026. While not directly applicable in Great Britain post-Brexit, UK-based providers with EU clients may need to comply with both regimes. The International Organization of Securities Commissions published its Good Practices for ESG Ratings and Data Products Providers in November 2021, which informs both regimes [3].
UK insurance underwriters use ESG ratings as one input among several. Major composite insurers and Lloyd’s managing agents commonly licence MSCI ESG Ratings, Sustainalytics ESG Risk Ratings or S&P Global ESG Scores. Ratings inform two main activities: investment portfolio screening, where insurers’ general account assets are filtered or weighted by ESG criteria; and underwriting due diligence, particularly for large corporate D&O and professional indemnity risks.
Underwriters generally treat ratings as supporting information rather than determinative. The PRA’s SS 3/19 and the FCA’s expectations under PS23/16 emphasise that firms must understand the methodology behind any third-party data they rely on and exercise independent judgement [4]. The ABI has cautioned its members against over-reliance on any single ESG data source.
For listed UK companies, an ESG rating is increasingly part of the cost of capital equation. Insurers underwriting D&O cover for FTSE 350 and AIM-listed companies frequently reference MSCI or Sustainalytics scores when assessing governance risk. A material negative rating change can be a trigger for renewal review or premium adjustment. For unlisted SMEs, formal ESG ratings are less common but proxy assessments based on EcoVadis or CDP submissions are increasingly used.
UK businesses should not pay for “ratings inflation” services that promise to lift scores, but should engage directly with raters to correct factual errors, supply missing information and explain methodology adjustments.
A FTSE 250 UK manufacturer experiences a downgrade from MSCI ESG AA to A following methodology changes that weight scope 3 emissions disclosure more heavily. At renewal of its £30 million D&O programme three months later, the lead Lloyd’s underwriter cites the downgrade in requesting additional information on scope 3 measurement and the company’s transition plan. The company supplies an updated CDP submission, an externally assured scope 3 inventory and minutes of the board sustainability committee. The underwriter renews at flat terms.
This entry is part of the Apex Insurance Wiki. Last reviewed by Matt Bartlett on 2026-06-10. Next review: 2026-12-10.
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