UK FCA Prepared to Fight ESG Washing

    Stockholm (NordSIP) – During the first week of the COP26, Nikhil Rathi, CEO of the UK’s Financial Conduct Authority (FCA), the country’s financial regulator, announced a new ESG strategy. The new “strategy for positive change” focuses on the five main themes of “Transition”, “Team”, “Transparency”, “Trust”, and “Tools”.

    However, what caught our attention was Rathi’s discussion of a new ESG division. In line with recent inquiries into the sustainability work of Nordic regulators, NordSIP inquired further to understand the tools and resources available to allow the UK FCA to fulfil its ESG responsibilities.

    The Journey so Far

    “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,” Rathi told the audience at the COP26 in Glasgow.

    Reviewing the past two years of discussed the early steps that the regulator had taken towards integrating ESG and sustainable considerations into its work, as well as initial steps to raise awareness of this theme in the market.

    “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 [and to] support effective investor stewardship and to drive innovation,” Rathi said.

    “[We’ve] written to the chairs 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,” Rathi added.

    The Path Ahead

    Discussing the launch of the IFRS Foundation’s International Sustainability Standards Board (ISSB), Rathi described it as “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”. According to the regulator, the FCA remains “committed to encouraging internationally consistent outcomes in climate and ESG.”

    Going forward, the work of the UK FCA is guided by governmental policy and expectations, that the FCA “ ‘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,” Rathi explained.

    Tools and Resources

    To understand the work of this ESG, NordSIP reached out to the UK FCA to hear more about the mandate and work that the new ESG team conducts.“Under our current objectives and regulatory principles, we would already cover ESG issues related to financial services to some extent,” the UK FCA’s Press Office told NordSIP.

    “However, the Chancellor’s letter to our CEO on 23 March 2021 made our remit explicitly clear in its list of matters to which the FCA should have regard: ‘vii. Climate Change The government wishes to deliver a financial system which supports and enables a net zero economy by mobilising private finance towards sustainable and resilient growth and is resilient to the physical and transition risks that climate change presents. The FCA should have regard to the government’s commitment to achieve a net-zero economy by 2050 under the Climate Change Act 2008 (Order 2019) when considering how to advance its objectives and discharge its functions’,” the Press Office explained.

    Due to its recent creation, the UK FCA also seems to not have yet launched any investigation into ESG infractions. “Given that we have only started to make rules to cover ESG issues over the past 2 years, our main focus is on encouraging and helping firms to comply with our rules, rather than taking enforcement action at this point. However, our supervisory, enforcement and authorisations teams are increasingly taking ESG issues into consideration when talking to firms, approving products and considering whether or not rules have not been complied with. As our ESG framework strengthens (especially with relevant legislation to be introduced next year – as set out in the Treasury’s ‘Greening Finance: A Roadmap to Sustainable Investing’), we expect our supervisory and enforcement action to strengthen where it is necessary to take action,” the same source explained.

    However, should  asset managers misrepresent their ESG/sustainability efforts, the British regulator is prepared to handle such a situation. “We can use our usual supervisory and enforcement tools, and not approve products that are labelled as ‘ESG’ ‘green’ or ‘sustainable’ if we don’t think they genuinely meet that definition. Our key focus is on working with firms to ensure compliance to start with.”

    Filipe Albuquerque
    Filipe Albuquerque
    Filipe is an economist with 8 years of experience in macroeconomic and financial analysis for the Economist Intelligence Unit, the UN World Institute for Development Economic Research, the Stockholm School of Economics and the School of Oriental and African Studies. Filipe holds a MSc in European Political Economy from the LSE and a MSc in Economics from the University of London, where he currently is a PhD candidate.

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