Building a blueprint for trust, innovation and a green future
Last month, the Financial Conduct Authority (FCA) published its 2023/24 Business Plan, committing to build trust and drive innovation towards a sustainable financial system. The Plan aims to promote cultural change, improve transparency through disclosures around ESG factors, facilitate the transition to a net zero economy and support the UK’s commitment to halve emissions by 2030
You will hear more about my thoughts on the FCA Business Plan in the Leaman Crellin Podcast coming soon.
For now, here are my top three observations, from modernising an out-of-date regime to empowering investor stewards and activists, and everything in between:
1. Creating a competitive listing landscape
One of the FCA's key commitments to strengthen the UK’s position in the global capital markets will be to reform, modernise and simplify its Listing Regime.
Since 2008, the number of companies listing in the UK has dropped by a staggering 40%, and between 2015-2020, the UK accounted for only 5% of global IPOs. The FCA will propose a new listing landscape aiming to streamline the existing regime, encourage more companies to list and grow in the UK, and create a more competitive market that contributes to UK economic growth.
Diminishing UK listings due to a cumbersome, non-competitive, and outdated regime. |
As part of this overhaul, the FCA has not lost sight of the pressing need to continue to weave sustainable finance into every aspect of business. They have committed to embed the globally consistent and comparable International Sustainability Standards Board's (ISSB) reporting standards within the new architecture. The ISSB's standards will come into force next year, primarily focusing on climate, with the view to expand into other areas such as biodiversity, social and human capital etc.
2. A trustworthy and greenwashing-free zone
The FCA will soon finalise and publish the rules on Sustainability Disclosure Requirements (SDR) and investment labels, reinforcing the strengthening of consumer protection and trust in the market for ESG-related investment products and services. Once in force, the ISSB standards will be a core component of the SDR framework. Firms will have to navigate carefully where they straddle disclosure regimes, which ultimately aim to achieve the same thing but in very different ways. For instance, Article 8 or 9 labelled funds (under EU Sustainable Financial Disclosure Regime (SFDR)) may not even meet the minimum threshold criteria for any of the three proposed UK labels.
Some argue that these differing thresholds and labels could harm UK market competition and result in more sustainable products being available in the EU than in the UK. However, my view is that these higher thresholds and even the ‘Sustainable Improvers’ label, recognising transition, will be more effective in preventing greenwashing and create a safer and more trustworthy environment for sustainable investing.
Could the FCA investment labels drive sustainable business out of the UK or create a global sustainable gold standard where greenwashing is unable to thrive? |
Time will tell whether these higher thresholds could set the bar high for other jurisdictions and place the UK on the map as a global sustainable gold standard.
3. Tooling up staff and stewards
The “Finance for Positive Sustainable Change: Governance, incentives, and competence in regulated firms Discussion Paper” aims to drive cultural change by reinforcing a strong tone from the top on ESG, establishing clear accountability for ESG claims and commitments, and providing staff with the skills and competencies needed to incorporate environmental and social considerations into their business, risk, and capital allocation decisions.
Firms cannot continue to rely on ‘doing the right thing’ or on a small number of in-house ESG experts to drive that change. ‘Sustainable Finance’ will soon just be ‘finance’, and the sooner this is understood and embedded across every decision-making process and framework, the better.
To embed new ways of sustainability thinking into the industry’s operational practices and decision-making, it is imperative that the culture, values and competencies provide staff with the environment, knowledge, skills and tools to achieve this. |
Moreover, the FCA has turned its attention to promoting active investor stewardship. Stewardship plays such an important role in influencing positive sustainable outcomes and the transition to net zero. Stewards encourage companies to adopt sustainable practices, set ambitious emission reduction targets, improve transparency, and enhance governance structures to align with the goals of the transition to net zero.
Stewardship enables investors to drive long-term value and hold companies accountable for their environmental and social impacts. However, the FCA recognises that there are regulatory barriers currently preventing and holding back active stewardship that need urgent redesign. These barriers are likely driving more assertive techniques. Rarely a day goes by where I don’t see a headline relating to investor activism or lawsuits being brought against governments and company directors (e.g. environmental law charity, ClientEarth).
Regulatory barriers to effective active stewardship are likely driving more assertive techniques, such as investor activism and lawsuits, to drive sustainable change. |
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I suspect that the FCA recognises that stewardship, activism, and lawsuits all play equally important roles in advancing the transition to a sustainable and low-carbon future. These approaches work in conjunction with regulation and policy to create a multifaceted approach towards driving change. Stewardship provides a platform for engagement and dialogue, activism brings attention to specific issues and targets, and lawsuits enforce accountability and legal obligations. Together, they contribute to a broader movement that fosters sustainability, influences behaviour, and accelerates the transition to a net zero future. However, for this to have maximum effect, stewardship cannot be hindered by regulatory barriers.
In conclusion, the FCA's 2023/24 Business Plan demonstrates a commitment to driving a sustainable financial system, building trust, and facilitating the transition to a net zero economy. However, the path is not going to be easy, and there will be many hurdles to overcome. You can hear more about my thoughts on the FCA Business Plan 2023/24 in the Leaman Crellin Podcast coming soon.
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