An “inconsistent policy and legislative landscape in the UK” around ESG issues poses “serious challenges for financial market participants” and there is a need for “a clear vision from policymakers … in regards to the UK’s sustainability disclosures regime”. That’s the view of the UK Sustainable Investment and Finance Association (UKSIF) in response to the FCA’s discussion paper Finance for Positive Sustainable Change.
UKSIF is the leading membership organisation for sustainable finance in the UK and its response begins by welcoming “the FCA’s renewed focus on ESG governance, remuneration, culture, and related issues”. And it goes on: “Broadly speaking, we continue to see good governance as the ‘glue’ of ESG in many respects and seeking ways to drive forward tangible progress in governance, culture, pay, competence, and training in regards to sustainability factors across all businesses will be critical to deliver long-term growth in the economy and sustainable returns for clients and savers.”
Joined-up thinking
But, it says, there is a need for “an over-arching ‘stewardship strategy’, which could promote a more joined-up, coherent approach to investor stewardship in the UK”. UKSIF would support “an immediate focus on promoting and bringing together industry-wide guidance where possible”.
In summary, UKSIF’s main responses to the FCA discussion paper are:
- support for consideration of how policymakers can further promote the effectiveness of firms’ governance structures;
- a welcome for closer collaboration between all stakeholders to identify existing ESG-related frameworks;
- pressing for a coherent policy environment that avoids overlapping rules and guidance;
- support for an immediate focus on promoting and bringing together industry-wide guidance;
- adoption of a longer-term roadmap by the FCA that would clarify timelines and objectives.
UKSIF also suggests it could work alongside other leading industry groups “to explicitly highlight and collate current good practice from across industry”.
Worry is expressed about the possible development of one-size-fits-all approaches, with UKSIF saying “A very prescribed set of expectations from the regulator from the onset on embedding sustainability-related issues into objectives may not be entirely appropriate for all regulated firms spanning multiple sectors and geographies.”
No tick-boxing
It also warns against the adoption by firms of “a ‘tick-box’ mentality” and says it’s imperative that “good governance is truly embedded throughout a business”. It suggests: “New governance mechanisms could be promoted below the board level as well with an objective to upskill staff.” This could be done, for example, by embedding sustainability-related objectives into annual appraisals.
The UKSIF response warns against turning integration of ESG measures into “purely a compliance exercise without sufficient progress being made by firms in shifting their operations and transitioning to net-zero”. And it says: “we will need to avoid a common trend of higher remuneration across the board as the primary outcome of these considerations by regulated firms”.
It goes on to emphasise that: “we will need to avoid as far as possible companies linking ESG objectives to remuneration simply for its own sake and in the process encouraging ‘greenwashing’ risks”.
Pension schemes
There’s a particular focus on pensions schemes, with the response saying UKSIF “would strongly welcome further clarification to fiduciary duty in the form of detailed statutory, or nonstatutory, guidance for UK occupational pension schemes”.
Inconsistency in policy and legislation is identified as “a barrier”, and the response provides the example of “the UK’s approach to regulation of ESG ratings providers – we have questions on the extent to which the industry-led voluntary ‘Code of Conduct’ for ESG data and ratings providers will interact with, and complement, the work of HM Treasury considering bringing in ratings providers into the FCA’s ‘regulatory perimeter”.
The full response can be read on UKSIF’s website.