GRIP attended the City & Financial ESG data regulation summit 2023 to hear the latest policy update from Mark Manning, Strategic Policy Adviser on Sustainable Finance, FCA.

The FCA is focusing on how it can ensure a solid data and information foundation for the growth and integrity of sustainability finance. Manning began his presentation with a quotation attributed to Albert Einstein: “Not everything that can be counted counts and everything that counts can be counted.”

Manning described this as “a powerful message in the context of ESG and sustainable finance”. It is necessary to identify the information that counts and separate this from the information that does not. Decision makers should be able to access and trust this information.

Leverage information

Manning said: “If we do these things well, we’ll be equipped to leverage the information which counts to better inform markets, better inform decision making, better inform our understanding of sustainability related risks, opportunities and impacts.” The aim is to move capital towards transition finance, leading to a more sustainable future.

The International Sustainability Standards Board (ISSB) is a standard-setting body under the IFRS Foundation. It is mandated to develop sustainability-related financial reporting standards. Manning announced that, “we are on the cusp of seeing the first [ISSB] standards,” – the standards are due to be published in “a couple of weeks”.

Manning sees this as “strategic game-changer, a real milestone for the industry”. He believes they will answer the clear market demand for “complete, consistent, comparable and reliable investment material and corporate disclosure on sustainable related matters.” Including this information in annual financial reports alongside financial statements will inform companies, investors and lenders and help steer corporate decisions along the value chain.

“This is a strategic game-changer, a real milestone for the industry.”

Mark Manning, Strategic Policy Adviser on Sustainable Finance, FCA

The FCA has been involved in this initiative from the very beginning. It has a role as co-chair of the International Organization of Securities Commission’s (IOSCO) workstream on sustainable reporting. IOSCO is a member of the ISSB’s working group. The UK government was instrumental in the establishment of ISSB back at COP26 and the UK has sent a clear message of its adoption of ISSB standards.

Once the standards are in their final form and available for use in the UK, the FCA has signaled its intention to consult on overhauling the current climate disclosure rules, which are referenced to the Task Force on Climate-related Financial Disclosures (TCFD), to instead reference the ISSB standards. Manning said this will be, “a critical game-changer and foundation for improvement and enhancement of the flow of information across markets”.

Transition plan disclosures

Transition plans enable an organization to outline how it will deliver on its strategy to align with the latest climate science recommendations and keep itself in line or ahead of both internal and regulatory policy. ISSB is expected to include high-level provisions requiring transition plan disclosures. FCA sees a case for more granular and forward-looking information on transition plans. This will complement the ISSB standards and help build a solid foundation for the markets.

As the world decarbonizes, forward-looking information will be essential for market participants to assess how corporate prospects:

• adapt their business models;
• respond and contribute to transition to sustainable finance.

Robust, complete, consistent and comparable forward-looking information is essential to the credibility of instruments and products in the ESG area. It will also provide a solid evidence base for the commitments that companies are making around climate transition and the strategies they are employing to underpin those commitments. Having a foundation for corporate disclosure on transition plans that has structure creates a standardised way of thinking that can provide a structure framework for companies internally to make their corporate strategic decisions, and underpins transformational change.

This therefore supports the FCA’s three operational objectives:

• market integrity;
• consumer protection;
• competition in the interests of consumers.

The transition plan framework will be finalized by the FCA after the summer.

“[The FCA sees] a clear rationale for regulatory oversight of ESG data rating providers and for a globally consistent regulatory approach in this area.”

Mark Manning, Strategic Policy Adviser on Sustainable Finance, FCA

Reliance on data services is growing so it is crucial that there is a good transparency of the methodology and data that the data service providers are using. It is important that consideration is given to governance, conflicts management and systems and controls employed by ESG data rating service providers.

Recognising that, the FCA sees “a clear rationale for regulatory oversight of ESG data rating providers and for a globally consistent regulatory approach in this area”. The FCA invited ICMA and IRSG to develop a voluntary code of conduct drawing on IOSCO’s recommendations. This should be launched soon. In parallel the government has issued a consultation on future of regulation for sustainable finance.

Unlock capital

This is the ultimate purpose of equipping the market “to count what counts”. The government’s recent Green Finance Strategy asserted that “to deliver on the UK’s net zero ambition through the late 2020s and 2030s, an additional £50-£60bn ($64-$76bn) capital investment will be required each year”. The FCA has launched a workstream to further advance its role in helping markets align with the Green Finance Strategy framework and transition finance.

Manning anticipated two preconditions for the strategy to be a success:

• Data access – the need for access to broad-based raw data: The FCA is supportive of the work of the Climate Change Steering Committee which is overseeing work towards a net zero data public utility (NZDPU). Ashley Alder, FCA chair, has been invited to join that committee and the goal is: “to deliver open, free and centralized access to data for all stakeholders so that they can easily access those key transition data-related elements to support transition finance”.
• Investor confidence and incentives: In order to unlock capital and move towards transition to sustainable finance, Manning noted, “it is critical we legitimize investment in the transition rather than investment only in what is already green”. The FCA has recognized this and is developing sustainable labelling and classification. The FCA is currently consulting on the new regime which provides for an important category – “sustainable improvers”. This is designed to legitimize investment in companies that, while not already sustainable today, are on the journey to becoming more sustainable over time. Ultimately the market is going to need to underpin “sustainable improvers” investment by devising, reporting and recognising credible KPIs and metrics.