A strategy for positive sustainable change

Speaker: Nikhil Rathi, CEO
Event: COP 26
Delivered: 3 November 2021
Note: this is the speech as drafted and may differ from the delivered version

Highlights

• We have released our new strategy for positive change.
• The themes of trust and transparency remain at the core of our strategy. We are also announcing a programme of work to support a market-led transition to a more sustainable economy. And we aim to embed climate and wider ESG considerations in everything we do.
• The International Sustainability Standards Board, launched today, is a game-changer. We will work with IOSCO and others to promote adoption of the new Board’s global baseline sustainability reporting standards.
• We support the Government’s ambition to work towards making the UK the world’s first net zero financial sector. 
• To help mobilise the capital needed to keep emissions in check, we need to build a trusted market and internationally consistent frameworks and standards.

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Businesses, governments, regulators, financial service firms and individuals all have a part to play in tackling the climate crisis. This view is increasingly shared across society. 4 out of 5 respondents to our last Financial Lives Survey believe that businesses have a wider responsibility than simply to make a profit.

This has already translated to investment behaviour, with responsible investment funds accounting for almost 40% of net UK retail fund sales last year. And I’m delighted that we’ve seen such strong international consensus here today that finance is a critical part of the climate solution.

The Glasgow Financial Alliance for Net Zero, GFANZ, recognises that financial institutions can use their capital, their voice and their influence to encourage positive change across the economy. It is fantastic to see that the Alliance has secured net zero commitments[1] from more than 450 institutions, accounting for over $130 trillion in assets.

But the financial sector can only support the transition effectively if consumers can trust firms to deliver on their promises. Recently, we’ve seen growing scepticism about some companies’ and financial firms’ ‘‘green’’ claims. We can’t let this greenwashing persist and risk the flow of much-needed capital to help secure our futures.

That’s why environmental, social and governance (ESG) issues are so high on our regulatory agenda. And that’s why I’m here at Finance Day. 

Our work so far

Last year I was proud to join a regulator that is playing its part in pioneering a sustainable future. In 2019, the FCA concluded a wide-ranging discussion process to set our direction on climate change and green finance. 

Two years on, we’ve delivered on our initial priorities. We’ve taken steps to improve climate-related disclosures. To support effective investor stewardship and to drive innovation. 

And we’ve written to the chairs[2] of fund managers, putting them on notice that their firms need to do a better job to justify and evidence their products’ ESG credentials. Our supervisors will be following up with firms. And we will be challenging firms as they submit funds for authorisation. 

But we are the first to acknowledge that there’s much more to do.

Our strategy

So today (3 November 2021), we have released our new strategy for positive change[3]. The themes of building trust in the market for ESG products, and ensuring transparency along the value chain, remain at the core of our Strategy.

And to tackle the challenges ahead of us, we are committed to continuing our close collaboration with the widest range of partners – both public and private sector. No one has all the answers in this area. But we need to keep moving forward pragmatically and keep learning from each other. 

The Climate Financial Risk Forum – which we convene jointly with the Bank – is one important vehicle for joint work with industry. 

In October the Forum published its latest outputs. These span risk management, scenario analysis, disclosure, innovation and climate data and metrics. They include a mix of implementation guidance, analysis and case studies to help accelerate progress across the industry.

But importantly, we will expand our work to address 2 further themes. 

• First, consistent with the goal of Finance Day, our Strategy announces a programme of work to support a market-led transition to a more sustainable economy. 
• And, as the FCA adapts to the Chancellor’s expectation that we ‘‘have regard’’ to the Government’s commitment to a net zero economy in our regulation, we are working to embed climate and wider ESG considerations as a golden thread through everything we do.

To coordinate this work, I have established a new ESG Division. Led by our first ESG Director, this Division is expanding our resources and capabilities in this growing area. 

We seconded 3 members of staff to Mark Carney’s Private Finance Hub to prepare for this conference. They will bring back important experience and expertise to help us in the next phase of this journey.

Here are some of the key elements of our Strategy.

Global solutions to global problems

As the global market for green debt grows – issuance was $375 billion[4] in the year to end September – the UK is playing a central role. 

The UK Government recently raised £16 billion in its first 2 green gilt transactions[5]. And, in June, announced the launch of the UK infrastructure bank[6], with initial funding of £22 billion to support green infrastructure spending in the UK. 

And in the private market, we have seen the London Stock Exchange ‘green mark’[7] continue its success. More than 100 issuers now meet the criteria, accounting for over £140 billion in market capitalisation.

But we are committed to seeing climate change and sustainability integrated into all financial transactions, not just dedicated sustainability-labelled securities and investments. And the securities issuers and financial services firms that we regulate operate in global markets. So, we are committed to encouraging internationally consistent outcomes in climate and ESG.

Earlier today, we saw the launch[8] of the IFRS Foundation’s International Sustainability Standards Board; the ISSB. This is a game-changer and a crucial development in creating trust through transparency. The ISSB will set, for the first time, a global baseline of complete, consistent and comparable sustainability reporting standards.

I’m proud that the FCA has been closely involved in the ISSB initiative, as co-chair of IOSCO’s workstream on corporate sustainability disclosures. As we have seen in the impressive prototype climate standard published today, the ISSB will build on the excellent work of the Taskforce on Climate-related Financial Disclosures, TCFD – which now has some 2,600 public supporters. 

We were at the vanguard of a now-growing number of regulators to adopt the TCFD’s recommendations in their disclosure rules – introducing rules for our most prominent listed companies from January this year.

We recently consulted on further measures and received rich feedback and broad support. I can confirm that, by the end of this year, we will finalise new TCFD-aligned rules for a wider scope of listed companies, as well as asset managers and FCA-regulated asset owners.

In its Roadmap to Sustainable Investing[9], published last month, the Government clarified that proposed new whole-of-economy Sustainability Disclosure Requirements will build on the UK’s roll-out of TCFD. It confirmed that the ISSB standards will form “the backbone” of the corporate reporting element of the framework. 

We hope that other jurisdictions will similarly adopt the ISSB’s global baseline standards in their frameworks. I am encouraged to see the Finance Ministers and Central Bank Governors from 36 jurisdictions join the UK in welcoming the announcement[10] of the launch of the ISSB. We will continue to work with IOSCO and others to promote adoption.

Supporting the Government’s green finance ambition

We will have a central role in delivering the Government’s Roadmap for listed companies, asset managers, asset owners and investment products. 

So today, we have also launched a Discussion Paper on Sustainability Disclosure Requirements and investment labels[11]. The feedback we receive will guide our policy design, ahead of consultation on new proposals next Spring.

We anticipate 2 layers of disclosure: a concise and accessible consumer-facing layer; and more detailed underlying disclosures aimed primarily at institutional investors. Accompanying product labels will then help retail investors navigate the increasingly complex ESG investment landscape.

We will not waste time reinventing the wheel. Instead, we have formed an Advisory Group to leverage other work in this area. 

We will also have regard to IOSCO’s recommendations[12] on asset manager disclosures, which have also been published this week. As well as the EU’s Sustainable Finance Disclosure Regulation. 

Positive market-led solutions

Our Strategy aims to encourage positive market-led solutions where possible. We aim to build sound regulatory foundations and set appropriate guard-rails. 

An immediate focus is, of course, how best to support a market-led transition to a more sustainable economy. We support the Government’s ambition – announced today – to work towards making the UK the world’s first net zero financial sector. 

And we will work with the Government’s proposed new Transition Plan Taskforce and bodies such as GFANZ to clarify expectations and promote global consistency and comparability in transition plans – building from the TCFD’s recent guidance, which we aim to incorporate into our rules. 

Market discipline will also be key. We will continue to examine how well our regime supports the important role of active investor stewardship in driving positive change. 

Innovation and transformation

Consistent with the FCA’s wider transformation to become more data led, we are leveraging the world-leading capabilities of our Innovation Division to support our work on ESG.

Last month (October), we ran a highly successful TechSprint to crowd-source creative ideas for effective regulation of ESG. Participants offered solutions to a wide range of issues – from verification of companies’ carbon offsetting programs, to how impact scores can inform sustainable investment labels. 

On 4 November 2021, jointly with the City of London Corporation, we will announce 12 successful applicants to our Digital Sandbox Pilot on ESG data and disclosure, which goes live early next year. We will help participants develop proofs of concept and road-test their ideas.

Walking the walk

As you can see, we have a busy and ambitious agenda. 

The time for talking has come to an end. On some estimates[13], we need collective public-private investment of $100-150 trillion globally through 2050 to keep emissions in check and achieve the 1.5 degrees temperature goal. 

So, to help mobilise this capital it is imperative that in the coming years, as a global financial community, we build a trusted market and internationally consistent frameworks and standards: 

• to support the seamless integration of climate and sustainability into business, risk and capital allocation decisions
• to make sure that companies and financial services firms deliver credibly on transition plans aligned with their net zero commitments
• to ensure that investors have access to products and services that genuinely meet their sustainability preferences

So, with partners international and domestic, it is time to walk the walk and take the next step on the journey to transform our sector. And with it, our economy and our future.