Financial Conduct Authority  

Understanding the FCA's ESG strategy

Understanding the FCA's ESG strategy
 Pexels/Scott Webb

On November 3, the Financial Conduct Authority published a strategy on environmental, social and governance, setting out its target outcomes and the actions to be taken to deliver these outcomes.

The FCA’s core objective is to support the financial sector in driving positive change, while also aiming to build trust in green financial markets and increase transparency around sustainability matters.

Alongside the ESG strategy, the FCA also published a discussion paper on implementing the government’s ambitions for Sustainability Disclosure Requirements and investment labelling.

The publications came during the United Nations Climate Change Conference (COP26), hosted in Glasgow, and unsurprisingly have a strong focus on climate change and the role of finance in supporting the transition to a net zero economy.

Themes

The ESG strategy is based on five core themes: 

  • Transparency – promoting transparency on climate change and wider sustainability along the value chain.
  • Trust – building trust and integrity in ESG-labelled instruments, products and the supporting ecosystem.
  • Tools – working with others to enhance industry capabilities and support companies’ management of climate-related and wider sustainability risks, opportunities and impacts.
  • Transition – supporting the role of finance in delivering a market-led transition to a net zero, sustainable economy.
  • Team – developing strategies, organisational structures, resources and tools to support the integration of net zero and ESG considerations into FCA activities.

The first three themes have been previously stated by the FCA, while the last two are additional themes that have been included in the ESG Strategy.

Key actions

Beneath each of the five themes, the FCA has outlined a range of measures that it intends to implement over the coming months and years.

Aiming to bolster ‘transparency’, the FCA intends to enhance climate-related disclosures by completing the roll out of requirements aligned to the recommendations of the Task Force on Climate-related Financial Disclosures to asset managers, life insurers and contract-based pension schemes, while bringing appropriate regulatory oversight to improve the quality of such disclosures.

The FCA will promote global consistency and comparability in corporate sustainability reporting, primarily through its work with the International Organisation of Securities Commissions, the Financial Stability Board and the International Financial Reporting Standards Foundation. It also aims to enhance transparency of diversity and inclusion performance among listed companies and regulated companies.

In order to build ‘trust’, the FCA will support fair and effective integration of ESG into financial market decision-making, and trusted delivery of ESG-labelled securities, products and services. This will include developing a policy approach to ESG governance, remuneration, incentives and training/certification; supporting the government in delivering the UK taxonomy, SDR and a new sustainable investment label; and following up with authorised fund managers in relation to the FCA’s guiding principles on ESG/sustainable investment products.

Amid industry concerns about the quality of ESG service providers, the FCA is looking to support the integrity and effectiveness of ESG data, ratings, assurance and verification services.

In relation to ‘tools’, the FCA is aiming to influence internationally consistent outcomes in ESG; deliver an ambitious innovation programme; work closely with industry, civil society and academics to promote collaboration; and coordinate with other UK regulators and the government to develop a consistent approach.

In order to facilitate a ‘transition’, the FCA will promote credible and effective net zero transition plans by listed companies and regulated companies, in line with the government’s call for the disclosure of transition plans across the UK economy.

Similar to the work of the European Banking Authority, the FCA also intends to focus on integrating ESG into the prudential framework, including the disclosure of information on how companies assess and manage ESG risks.