The FCA 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.
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:
- Whether firms have environmental or social objectives and how these are reflected in their policies and strategies
- How firms design their approaches to governance, remuneration, incentives, training and competence, to deliver effectively on these objectives
- Practical challenges, and observed gaps and shortcomings
- Whether existing rules and guidance in these areas are appropriate, or need to be refined to adapt to the changing role of finance
The DP will be of interest to all regulated firms across the financial sector, in particular:
- Banks
- Building societies
- Insurers
- Asset management firms
- Investment firms.
And also to industry groups/trade bodies:
- Consumer groups and individual consumers
- Policy makers and other regulatory bodies
- Industry experts and commentators
- Academics and think tanks
- Civil society.
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
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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