Regulation  

What should the new FCA ESG committee focus on?

Robin Penfold

Robin Penfold

As announced on August 23, the Financial Conduct Authority is accepting CVs until September 16 for a new ESG Advisory Committee.

The regulator is looking for experienced candidates with appropriate expertise to both advise its board on exercising oversight of environmental, social and governance issues and assist with developing its own ESG strategy. The committee will also analyse and advise the FCA on emerging ESG issues. 

While CVs are being handed in, it is worth reflecting on the potential role and impact of the committee, and how this interacts with other key priorities for the sector. 

The FCA’s current ESG strategy

Prepared in response to HM Treasury’s remit letter in 2021, the FCA published its current ESG strategy in November. Across five core themes (transparency, trust, tools, transition and team), it sets out the FCA’s plans to deliver the target outcomes it outlined in its 2021-22 business plan. 

This includes: 

  • Work to promote transparency through introduction of TCFD-aligned climate-related disclosure requirements for listed companies, asset managers, life insurers and FCA-regulated pension schemes;
  • New rules around board diversity disclosures;
  • Work to build trust and integrity in ESG-labelled products;
  • Support for firms’ management of climate-related and wider sustainability risks; and
  • Collaboration to enhance industry capabilities and support innovation.

A new regulatory principle for the FCA

All eyes are on the financial services and markets bill 2022-23, which will have its second reading in the autumn.

In its current form, the bill will remove the existing sustainable growth principle for the FCA and the Prudential Regulation Authority from the regulatory framework, and introduce a new regulatory principle for them to consider the UK’s climate target in line with the government’s net-zero strategy when discharging their general functions.

Both regulators will be obliged to consider the need to contribute towards achieving compliance with the net-zero commitment in section one of the Climate Change Act 2008. 

This new regulatory principle will underpin the ESG Advisory Committee’s activities and ensure the FCA keeps ESG considerations front of mind in its day-to-day work, and when developing future policy. 

Potential areas of focus for the new committee

The FCA has been increasingly active on ESG issues over the past few years. It noted in its 2022-23 business plan that it aims to promote positive market-led solutions where possible through close collaboration with government, regulators and industry.

The focus of FCA interventions will be on “building sound regulatory foundations and setting appropriate guard-rails”, with an aim to strike the right balance between principles and prescription.

The FCA recognises it needs to deepen its knowledge of the changing landscape to finalise its longer-term ESG priorities. 

New ESG rules need to be ambitious, workable in practice and avoid imposing regulatory barriers. One key role for the new committee will be in helping to address the FCA’s need to build its resources and capabilities on ESG beyond climate change.

Future FCA regulation will need to take a broader ESG perspective, encompassing further environmental issues such as nature and biodiversity and further social issues such as diversity and inclusion, workers’ rights and supply chains. 

There are a number of areas that the committee’s experts could prioritise. These include:

1. Green financial products for retail customers, compliant with the forthcoming consumer duty (requiring firms to act to deliver good outcomes for retail customers – read our CPD article on what this means for firms).