A strategy for positive change: our ESG priorities

Implement the TCFD’s recommendations in our Handbook, for listed companies and FCA-regulated asset managers and asset owners.

At the end of 2020, we introduced a new ‘comply or explain’ disclosure rule for our most prominent listed companies (PS20/17[15]).  

During the second half of 2021, we have been consulting on proposals to: 

• extend the application of our existing disclosure rule to issuers of standard listed equity shares (CP21/18[16]) 
• introduce new client-facing disclosure requirements and guidance for asset managers, life insurers and FCA-regulated pension providers (CP21/17[17]) 

These consultations closed in September 2021. We will publish policy statements finalising our new rules by the end of the year [published PS21/23 [19]and PS21/24[20] in December 2021].    

As part of our new prudential regime for MiFID investment firms (the Investment Firms Prudential Regime), we will be consulting on the introduction of ESG disclosures for these firms in 2022 (see ‘Transition’). 

Roll out appropriate oversight, supervision and enforcement mechanisms to improve the quality of disclosures.

As new disclosure rules are introduced over the coming years, we will implement successively oversight, supervision and enforcement mechanisms to improve the quality of disclosures. Our rules for premium listed companies are already in force and the first disclosures will be made in early 2022. For these disclosures, we will: 

• assess how well listed companies have complied with the new requirements 
• identify areas of concern and clarify good practice  

Given the Financial Reporting Council’s (FRC’s) role in review and oversight of corporate reporting, we collaborate closely with FRC colleagues in this activity. We released more information (for listed companies and their advisers) on our approach to monitoring compliance with the new premium and proposed standard listing rules via Primary Market Bulletin 36[23] in November 2021. 

Over time, we also plan to apply data analytics and machine learning techniques to detect where listed companies may not be complying with our rules. This will help identify poor practice at a much earlier stage, so as to prevent harm to investors and protect market integrity.  

The introduction of our TCFD-aligned disclosure rules for premium-listed companies has been mirrored in the UK digital reporting taxonomy (provided by the FRC, and adopted by us for reporting by companies admitted to trading on regulated markets). This facilitates the digital structuring of these disclosures and their distribution (through companies’ accounts via the National Storage Mechanism (NSM)) into the market.  

Quality structured data aligned with regulation is key to the FCA’s goal of data-led regulation. We are also considering how we can leverage the NSM to support the emergence of data service providers – thereby improving the flow of information along the investment chain.  

We aim to do this by:

• working actively with the International Organisation of Securities Commissions (IOSCO), the Financial Stability Board (FSB) and the International Financial Reporting Standards (IFRS) Foundation  
• encouraging rapid progress beyond climate-related disclosures towards wider environmental and social disclosures  
• promoting effective audit and assurance of sustainability-related disclosures, working with domestic and international partners  
• developing UK implementation plans for forthcoming global standards, jointly with Government and other regulators (including interim measures, as appropriate)

Consistent with our pursuing ‘global solutions to global problems’, we have been influencing international efforts towards a common global baseline of investor-focused sustainability-related reporting standards. To ensure we leverage existing industry capabilities, we are promoting a solution that builds on the TCFD’s recommendations and other existing frameworks (as well as ongoing work by the Taskforce on Nature-related Financial Disclosures[19]).

We co-chair a workstream on sustainability reporting under IOSCO’s Sustainable Finance Taskforce. In a report released in June 2021[20], IOSCO set out the outcomes of this work so far. The report elaborated on IOSCO’s vision for an International Sustainability Standards Board (ISSB) to sit alongside the International Accounting Standards Board under the IFRS Foundation.  

Strong momentum has built behind this work in recent months. Consistent with IOSCO’s vision, the IFRS Foundation has set out its strategic direction and has been working towards establishing the new Board at COP26 in November 2021. [The IFRS Foundation launched the ISSB[21] at COP26 in November 2021].

Jointly with other UK authorities, we are committed to adopting the ISSB’s standards. In its Roadmap to Sustainable Investing[17], published in October 2021, the Government confirmed that it expects the ISSB standards to form a 'core component' of the SDR and the 'backbone of its corporate reporting element'. We will work with the FRC and others to establish and implement an appropriate oversight and enforcement mechanism for disclosures against the new standards.

In our work with IOSCO, we are also examining the framework for audit and assurance of sustainability reporting. We consider that audit and assurance have a critical role to play in promoting high-quality disclosures that are appropriately integrated with financial reporting. 

Furthermore, continuing the important theme of digitisation of data, the application of structured data formats to facilitate the machine-readability of sustainability-related disclosures in accordance with the new standards would enhance their usefulness to support decision-making across financial markets. As new sustainability-related disclosure standards are introduced, we will encourage the use of digital taxonomies, both internationally and domestically.

In July 2021, we published a consultation paper (CP21/24[22]) on proposals to improve transparency on the diversity of listed companies’ boards and executive management teams. We also published (in collaboration with the Bank of England) a discussion paper (DP21/2[12]) examining how we can accelerate the pace of meaningful change on diversity and inclusion and what role we can most usefully play to support this change.

Better, comparable information on board and executive diversity will allow investors to make investment decisions in line with their values, reduce investor search costs, and inform shareholder engagement. Over time, we expect enhanced transparency to strengthen incentives for companies to progress toward greater diversity on their boards. This may have broader benefits in terms of the quality of corporate governance and company performance.  

More broadly, over time, we expect that SDR will help progress key social and governance objectives – including by requiring information that extends beyond financial risks and opportunities, and toward a more complete picture of the impact that businesses have on the environment and society. And we will take note of the assessments that the FRC undertakes of companies’ reporting against the Corporate Governance Code and work with the FRC to advance corporate governance and ESG objectives. 

We see healthy culture as critical both to consumer protection and well-functioning markets. A firm’s governance, purpose and culture are central to its values as an organisation; to how its people conduct themselves; and to how it embeds ESG considerations in the design and delivery of its products and services for the benefit of clients and consumers.  

So, we will do more work to encourage a strong ‘tone from the top’ on ESG, supported by clear accountability for ESG claims and promises, and the right incentives – including through remuneration. This work will build on the extensive work that we already do on governance and professionalism. The stakeholder feedback we are already seeking on diversity and inclusion is part of this.  

As the focus on ESG grows, we need to guard against ‘competence-washing’. That is, we need to promote genuine capability-building across the financial sector, including through functional training, and potentially certification. Firms may also need to consider general staff training on climate change and net zero, and ESG more broadly – just as we are committed to doing within the FCA (see ‘Team’). This will help to build awareness and ensure the organisation’s objectives and values are embraced by staff and embedded across functions. 

The Government’s SDR regime will include entity- and product-level disclosures by asset managers and other institutional investors. Alongside these, the Government’s Roadmap to Sustainable Investing[28] also elaborated on plans for work on sustainable investment labels and expectations of investment advisors. We will have an important role in delivering on these ambitions. We released a discussion paper (DP21/4[23]) seeking feedback on the shape of the regime, ahead of consultation [published CP22/20[31] in October 2022].  

This package will increase the availability of consistent and comparable sustainability-related financial information along the investment chain. It will also help to build trust in the market for ESG/sustainable investment products by helping to combat misleading claims. 

We will need to ensure that consumer-facing communications under the regime are accessible and decision-useful. The design of these will be informed by a second phase of consumer behavioural experiments to be carried out in late 2021/early 2022, building on consumer research[24] published in July 2021. [Findings published in the Occasional Paper 62[25] in October 2022.]

SDR and sustainable investment labels will be complementary to, and build on, our existing rules framework. We recently issued a letter to chairs of authorised fund managers[26], drawing firms’ attention – through a set of guiding principles – to how we expect existing rules to be applied in the ESG context.  

We noted the poor quality of some of the applications for authorisation of ESG-oriented funds that we have received. And we reiterated our expectation that firms should be putting consumers at the heart of their businesses, offering products and services that are fit for purpose and which they know represent fair value.  

We plan to follow up on this letter and the guiding principles in our authorisations processes and embed them in our supervisory engagement.  

As industry participants more fully integrate ESG into their activities and expand their ESG-focused product offerings, they are increasingly reliant on third-party ESG data services, as well as ESG ratings and benchmark indices. So, it is increasingly important that these services are delivered in a fair, effective and transparent way. 

ESG matters are, by their nature, wide-ranging and complex. As a result, each data, ratings or benchmark provider makes different choices about which ESG factors to consider in its methodology. And which metrics to use to measure performance and how to weigh them. This can have a direct effect on investment decisions and capital flows.  

In the case of ESG ratings, different methodological choices result in a low correlation between different providers’ ratings. Consequently, without transparency of these methodologies, it may be difficult to interpret and compare outputs across providers, potentially leading to harms for consumers.   

We considered these topics in CP21/18[21]. We called for feedback on whether there is a case for regulatory intervention. We are currently analysing responses and will feed back by mid-2022 [published FS22/4[26] and PMB 41[27] in June 2022]. The Government similarly noted, in its Roadmap to Sustainable Investing[32], that it is important providers deliver ESG data and ratings transparently, and that they have strong governance and management of conflicts of interests. The Government is therefore considering bringing these firms into the scope of FCA authorisation and regulation.  

Again, consistent with the principle of global solutions for global problems, we support internationally coordinated solutions in this area. We have therefore, in parallel, contributed to IOSCO’s work[26] on ESG data and ratings.  

We will also continue to consider our role in supporting other enhancements to the ESG ecosystem. For instance, we are actively engaged in industry dialogue on matters such as voluntary carbon markets, and ESG in derivatives and securities lending markets. 

Cooperation between industry participants (and between industry and Government /regulators) is essential if we are to tackle ESG challenges effectively. The potential tension between cooperation and competition law has been much debated and we have seen some examples of this tension in practice.  

We have considered how we can address this potential tension to support our ESG objectives. Firms can cooperate to pursue certain objectives but must do so within the parameters set out in law. If stakeholders bring to our attention uncertainty in relation to specific potential ESG-related initiatives that may raise novel and significant concerns about competition law, we will consider whether and how we can either provide clarification, or take other regulatory actions. 

We will continue to collaborate with the Competition and Markets Authority, which also has work underway in this area. 

Climate change is a challenge that extends beyond national borders. So, we need a global response. International coordination on ESG matters is key to avoiding regulatory arbitrage and fragmentation, and finding agreed solutions to common ESG challenges.

We aim to position ourselves as a leader internationally and as a conduit, both through active engagement in international settings, and leading by example. We are leading members of ESG-focused working groups within global standard setters, such as IOSCO and the Financial Stability Board.   

We will continue to leverage our participation in these – and other – international groups, using our voice and influence to promote globally-aligned solutions where possible.  

This includes: 

• following up on a TechSprint on ESG data and disclosure, held in October 2021 
• in partnership with the City of London Corporation, inviting a second cohort of the Digital Sandbox[27] to test and develop products and services to address industry challenges in ESG data and disclosure 
• launching the Green Fintech Challenge[28] 2.0 
• scoping how data science and analytics can support the FCA’s regulation of ESG  

Technology can help to tackle some of the challenges faced by the financial sector in embedding ESG considerations across their activities. Through our Innovation Division, we are pursuing an extensive work programme, leveraging our suite of regulatory tools to support the development of new approaches and solutions in sustainability and climate change.   

We hosted a successful Sustainability TechSprint in October 2021. The aim was to encourage innovative ideas on how we can harness technology to monitor ESG data and disclosures more effectively. Solutions addressed issues ranging from verification of companies' carbon offsetting programs, to helping develop sustainable investment labels using impact scores.  

In addition, working with the City of London Corporation, we have received 40 applications to our Digital Sandbox cohort. This cohort of the Digital Sandbox will focus on creative solutions to industry challenges in ESG data and disclosure. We will support 12 successful applicants in this programme, which begins in January 2022.   

We also invited innovative firms to apply to participate in our Green FinTech Challenge, an opportunity for innovative firms to launch climate- and ESG-focused products and services as part of our Regulatory Sandbox.  

Linked to the ‘Team’ theme, we are also pursuing internal work to scope how data science and analytics can help embed ESG considerations across FCA functions.  

Including via: 

• the FCA-PRA co-chaired Climate Financial Risk Forum 
• deeper engagement on ESG with the FCA’s statutory panels 
• participation, as an observer, on ESG-related industry working groups 
• an enhanced programme of market intelligence gathering, networking and horizon scanning 

We will continue to work closely with stakeholders and will extend our arrangements for gathering market intelligence, horizon-scanning and collaboration with relevant industry groups, non-governmental organisations and academics. There is no need to reinvent the wheel.  

The Climate Financial Risk Forum (CFRF), which we co-chair with the PRA, was established in 2019. It brings together senior financial sector representatives to share their experiences in managing climate-related risks and opportunities, and help build capabilities and capacity across the industry.   

In 2020, the CFRF published industry guidance materials, on disclosure, risk management, scenario analysis and innovation. And over the course of 2021, the CFRF built on this work, launching in October 2021 a further series of outputs, including guidance and tools to help accelerate firms’ capability-building. 

The Government and financial regulators have common – and often overlapping – interests in ESG and sustainable finance. Close cooperation, collaboration and coordination is essential to reducing duplication, and avoiding potential conflict between policy interventions or confusion among stakeholders. Our aim is pursue consistent and coherent policymaking, and to ensure that interventions are led by the right authority, leveraging the right tools and powers. As a recent example, we collaborated with the Government and the Bank of England to help build G7 and G20 support for a pathway towards mandatory TCFD-aligned disclosures and the IFRS Foundation’s initiative to establish the ISSB.  

Alongside extensive bilateral engagement and collaboration, we are active participants in a range of cross-regulatory and cross-Whitehall fora, including groups on TCFD implementation, the Green Taxonomy, sustainability disclosures and investor stewardship. We take a coordinating role where appropriate and influence the direction of travel. We will continue to collaborate domestically in support of the Government’s 2019 Green Finance Strategy and Roadmap to Sustainable Investing[41].

Including by: 

Promoting well-designed, well-governed, credible and effective net zero transition plans by listed companies and regulated firms. 

The Government has set a clear direction of travel towards requiring the disclosure of net zero transition plans across the UK economy. [See the Government’s announcement[26] at COP26]. We have a role to play in delivering on that ambition. [UK Transition Plan Taskforce’s initial outputs[27] published in November 2022.]

We will engage with stakeholders in the first half of 2022, with a view to promoting credible and effective transition plans that consider the Government’s net zero commitments. We will consider matters such as the: 

• governance of transition plans, including Board oversight, senior management responsibilities and objectives, and remuneration/incentive structures 
• the content and disclosure of transition plans, building from TCFD guidance[28], which we have proposed to integrate into our TCFD-aligned disclosure rules  

We will work with the Government and engage actively with the Climate Financial Risk Forum and other bodies, such as the Glasgow Financial Alliance for Net Zero, to promote consistency and comparability in the approach to net zero planning and associated disclosures. We will also consider mechanisms for market discipline and accountability that will support positive market-led outcomes; see also 'effective stewardship' below. 

In parallel, we are considering our own commitments in this area and under ‘Team’ implementing arrangements across the organisation consistent with the expectation in the Government’s remit letter that we ‘have regard’ to net zero in discharging our functions as a regulator. 

Ensuring that our regulatory regime sets the right expectations and incentives across all E, S and G dimensions. 

We will scope a programme of work to ensure that our regulatory framework adequately supports positive ESG outcomes. We will consider the incentives in place across the financial sector, and examine potential informational, institutional or regulatory barriers to a market-led transition to a more sustainable future – across all E, S and G dimensions. We plan to engage with stakeholders during 2022 and will communicate next steps in due course. 

We will pay particular attention to work on diversity and inclusion. This work helps to ensure a fairer and more just society but also – crucially – creates the conditions for more creative, dynamic organisations that are better equipped to rise to environmental and societal challenges. We will undertake this work both independently and in partnership with official sector stakeholders. 

Prudential policy is one area in which we are already planning further work on ESG. We will review our prudential regimes to ensure that regulated firms disclose information on how they assess and manage ESG risks, and relevant outcomes, where this would be beneficial to consumers and markets. We will commence with MiFID investment firms (as part of the Investment Firms Prudential Regime), with a view to consulting on prudential ESG disclosures in the second half of 2022.

As the role of finance is placed at the heart of public policy efforts to transition to a more sustainable future, active investor stewardship has been identified as one important way to pursue environmental and social goals.  

Over the past 2 years, we have linked our work on stewardship (as set out in DP19/1 [29]and FS19/7[10]) to related work on climate change and sustainable finance, and have enhanced requirements on firms to encourage effective and responsible stewardship (see PS19/13[30]).  

We will work closely with the FRC, other regulators and industry as firms continue to develop their stewardship strategies, building on the FRC’s strengthened Stewardship Code 2020. We will monitor engagement between investors and issuers, and the exercise of investor stewardship, including voting at Annual General Meetings. We have said that if there is insufficient evidence of active stewardship to advance environmental and social goals, we will consider further regulatory action. 

In relation to climate, active investor stewardship is an important tool to support an effective transition to a net zero economy. We consider that it is active engagement and exercise of voting rights that will drive change, rather than simply divesting from high-emitting companies – which just shifts ownership from those that 'care' to those that don't. 

We will therefore consider how well our regime supports the important role stewardship can play in influencing companies’ climate strategies, holding Boards and management to account and monitoring performance against their climate commitments. This links firmly to the work on net zero planning described earlier. We will consider what information investors need on companies’ net zero plans to exercise effective stewardship.  

In this regard, we have been considering how investor engagement and the exercise of existing shareholder rights, such as shareholder resolutions and voting against directors, can be used more effectively to encourage positive ESG outcomes. As part of this, we are engaged in the debate on a shareholder ‘Say on Climate’, which some consider a promising vehicle for shareholder scrutiny of companies’ climate transition plans.  

The Stewardship Regulators Group (cross-regulator and -Whitehall) surveyed a group of engaged stakeholders on this topic during the summer of 2021. Drawing on the responses received, and working closely with the FRC and relevant investor and issuer groups, we will consider next steps. This will include how we could potentially help to facilitate an industry-led approach in this area.   

Also working with industry, another area of focus will be how well asset owners’ and asset managers’ stewardship activities are supported by the voting infrastructure, service providers and the wider stewardship ecosystem (including proxy advisors and investment consultants). We recognise that the landscape is shifting, with some asset managers giving clients more scope to participate in voting decisions. And we will consider the recommendations for enhancements to voting disclosure[31] recently published by the Taskforce on Pensions Schemes Voting Implementation. 

Develop and implement ‘embedding’ strategies and solutions across all relevant FCA functions and sectors.

We are working to integrate ESG considerations, with net zero considerations as an initial priority, across the FCA’s functions. The policy work that we have described under the other themes will directly promote specified ESG outcomes. But we are taking steps to embed net zero and wider ESG considerations in all our policy work, as well as our market oversight, supervision, authorisations and enforcement activities. We are targeting a ‘golden thread’ approach, whereby these considerations are integrated seamlessly and comprehensively into our work across the organisation.  

Reflecting the scale and urgency of the climate challenge, and the explicit inclusion in our remit of a requirement to ‘have regard’ to net zero, climate change will remain a priority. However, we are working to ensure that, as an organisation, we keep pace with the integration of wider environmental and social considerations in economic and financial decisions and financial instruments, products and services. 

This will include, for example: setting ESG-related expectations at the Authorisations gateway; incorporating ESG-related questions and criteria in supervisory assessments and engagements; and building ESG-related elements into enforcement models.  

Build resources and capabilities in the FCA’s ESG Division and across the organisation, including staff training.

To support the internal integration of ESG considerations across our activities, we have established – and will continue to develop – a ‘hub and spokes’ model. Our ESG Division operates as a centre of expertise, intelligence, coordination and planning for the FCA on ESG matters.  

But the outcomes we are targeting will be achieved only if our organisation has ESG at the heart of all of what it does. So, across each part of the FCA (the ‘spokes’), we are developing a network of experts to help drive our agenda and to provide two-way interaction with the ESG Division. The ESG Division contains both subject matter experts and a team responsible for the ongoing embedding process to ensure that the ‘local’ experts across the organisation have the support they need. 

The ESG Division will continually assess the potential for the FCA to fulfil its ESG aims with current resources. Where no such resource is available, we will seek to draw on external expertise from industry, civil society, the Government and elsewhere to help build our ‘Team’ capabilities as needed, taking regular account of how workstreams are developing. 

We are also reviewing our internal governance structures.

Develop systems and processes to coordinate activities and evidence delivery. 

In support of the above, the ESG Division coordinates the cross-FCA work programme. It tracks delivery of our commitments and expectations, reporting to the ESG Director and the ESG Committee. 

Take steps to develop a data-led approach to regulation of ESG to increase the effectiveness of our regulatory oversight and enhance our capabilities.

Improved disclosure of ESG-related performance along the investment chain, combined with technological progress, will yield ever greater and richer streams of data. Data-led approaches can help inform and prioritise our supervisory engagement and target interventions more effectively. So, these developments offer us considerable opportunity to strengthen our regulatory practices, improve our evidence base, and increase the effectiveness of our oversight of markets, listed companies and regulated firms. 

We will be following up on insights from our Innovation team’s recent TechSprint which explored possible solutions in this area (see also ‘Tools’). 

We will publish our inaugural TCFD-aligned disclosure report in summer 2022 and annually thereafter (aligned with the reporting cycle for our Annual Report). This will role model transparency and good practice, aligning with what the Bank of England has done since 2020.  

In developing our disclosures, we will target consistency with our expectations of listed issuers, asset managers, life insurers and FCA-regulated pension schemes under our existing and proposed TCFD-aligned rules.  

Beyond climate change, we are committed to enhancing our performance across other ESG dimensions. Notably, as an organisation, we are committed to being as diverse and inclusive as possible, reflecting the communities in which we work and the consumers we protect.

We discussed in our Climate Change Adaptation report[14], published in October 2021, our use of 'systems thinking'. Systems thinking allows us to look across the financial system and identify linkages between its different components.  

Through this, we can examine how changes in one part of the system may have repercussions elsewhere – intended or otherwise – or, at least, to identify where we have knowledge/data gaps. This allows us to adopt a more informed and evidence–driven approach to complex policy interventions, such as those related to cross-cutting issues like ESG. This is vital if our interventions are to succeed in furthering the ESG outcomes we want to see.  

As we noted in the Climate Change Adaptation report, our systems thinking work in the ESG space is continuing. We will use this ongoing work to help identify where we can best bring our regulatory tools to bear to achieve our aims.