Finance for Positive Sustainable Change: Understanding the FCA’s Discussion Paper

The FCA’s Discussion Paper (Finance for positive sustainable change: governance, incentives and competence in regulated firms – February 2023) is a detailed paper, aimed at creating an industry-wide dialogue on sustainability-related governance, incentives and competencies. The Discussion Paper (DP) will use the feedback obtained to shape the FCA’s future regulatory approach.
Good governance, purpose and culture are increasingly seen as necessary to a firm’s ability in embedding environmental and social considerations into business, risk, and capital allocation decisions. In recent years, there have already been efforts to examine the management of firms’ sustainability-related risks and opportunities, through the work of the Taskforce on Climate‑related Financial Disclosures (TCFD), which has focused on climate change.

The financial sector’s role in transitioning to a net-zero economy

The financial sector has an important role to play in contributing to the transition to a net zero economy. In a rapidly evolving landscape, companies in the financial sector must continually adapt their objectives and priorities and improve their business models and strategies, and governance structures and incentives must adapt accordingly.

The FCA’s Financial Lives Survey has revealed that in May 2022, 79% of consumers think businesses have a wider social responsibility than just making profits. Over the long term, investing in businesses that pursue wider sustainability goals, is expected to have a positive effect on these businesses. At present, over 550 firms across more than 50 jurisdictions, have voluntarily signed up to the Glasgow Financial Alliance for Net Zero (GFANZ) and have committed to progress towards a net zero economy. The UK’s Transition Plan Taskforce (TPT) was launched in 2022 to support the UK Government’s commitment to making the UK the world’s first net zero financial centre. Both organisations recognise that fundamental changes to governance, strategies, incentives, and culture are required in order to deliver on net zero commitments.

Examining governance, incentives, and competencies in TCFD, ISSB, TPT, and GFANZ

FCA’s DP examines how governance, incentives and competence are considered in TCFD’s recommendations and how the work of the International Sustainability Standards Board (ISSB), TPT and GFANZ are shaping expectations. It also examines how a firm’s governance supports its sustainability-related objectives and strategies and how asset managers and owners can influence positive change through their stewardship activities. A chapter is dedicated to training and competence in firms and the next steps are also discussed. The DP also includes commissioned articles which are aimed at helping firms with their approaches to governance, incentives and competence in supporting positive change.

Through the DP, the FCA seeks feedback to help them support the role of the financial sector in enabling an economy-wide transition to net zero and a sustainable future. The “Trust” theme of the FCA is aimed at creating “the right conditions for fair and effective integration of ESG into financial market decision-making, and trusted delivery of ESG-labelled securities, products and services …” The FCA are interested in the firm’s purpose and how it relates to sustainability objectives, in which a remuneration is a crucial tool in order to achieve long-term sustainability goals.

The DP questions focus on:

A further goal of the DP is to invite specific feedback on how FCA regulated asset managers and asset owners govern and incentivise investor stewardship, in order to encourage sustainability strategies in firms. This goal aligns with FCA’s ESG Strategy and with the proposed amendment to FSMA 2000 to introduce a new regulatory principle for the FCA and PRA which aims at contributing towards achieving the net zero greenhouse gas emissions target set by the Government by 2050.

The DP will be of interest to all regulated firms across the financial sector, in particular:

And also to industry groups/trade bodies:

The DP emphasises that “good governance with board oversight, clear board-level accountability and independent challenge are essential to manage and oversee all material risks, opportunities and impacts, including those related to climate change and wider sustainability.”

The role of the board and senior management is discussed: the PRA has set expectations that an effective board needs to include individuals with the skills and experience necessary to make informed decisions – this includes having board members with expertise in sustainability-related matters, or the ability to facilitate access to that expertise.

In conclusion, FCA’s DP discusses the next steps, encouraging stakeholders to engage with the DP’s topics. The FCA is considering how to better support industry and if there is a need for introducing further regulation in the area of governance, incentives and competencies in regulated firms, in which the topics in the DP will play a significant role.

Dr Jacqueline Faridani

Dr Jacqueline Faridani heads up Prospect Law’s fast growing ESG practice. She is an advisor in financial risk management with 20 years of experience in a variety of risk management, compliance and product control roles at Canadian, German, French and Russian banks and life insurance companies, as well as for the Canadian financial regulator (OSFI).

Prospect Law is a multi-disciplinary practice with specialist expertise in the energy and environmental sectors with particular experience in the low carbon energy sector. The firm is made up of lawyers, engineers, surveyors and finance experts.

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