FCA view: why trust and transparency are critical priorities for ESG-focused regulation
Mark Manning, Technical Specialist, Sustainable Finance and Stewardship at the Financial Conduct Authority explains why getting the balance right between principles and prescription is important for ESG frameworks
Fund Operator POSTED ON 2/11/2022 5:49:37 PM
Fund Operator: What are the primary areas of concern that need to be addressed by a regulatory Framework and how will these be shaped into the regulatory agenda?
Mark Manning: Transparency has been very central to what we have been doing on the ESG front over the past several years.
We have taken the view that high quality information along the investment chain is essential to inform business risk and investment decisions within the market and amongst clients and consumers.
Ultimately, this transparency piece is very pertinent to what we are trying to achieve. We also want to do this consistently on an international basis as well.
This is why we have been very focused on TCFD as the framework that we are looking to align with, and we have been working closely with IOSCO and the IFRS foundation to get some kind of international standardisation of corporate reporting in order to really feed the markets with the information that they need in order to make the right decisions.
“Transparency has been very central to what we have been doing on the ESG front over the past several years.”
In terms of other areas of key focus from the regulatory side, trust and market integrity are fundamental.
Ultimately, market participants and end consumers need to be able to trust green and sustainable investment products and the claims that are made by the providers of these products.
A big part of what we have been doing over the past couple of years has been looking at potential pockets of harm in the marketplace and try to use the breadth of our tools, not just rule making, but supervision, and our authorisations process in order to try to ensure that the information provided by market participants and firms can be trusted by consumers, and thereby underpin their confidence to invest in accordance with their ESG preferences.
Fund Operator: In making any intervention, how should policymakers approach the design of the framework? The standard criticism is that once policymakers seek to intervene, it typically leads to market inefficiencies. How do we balance this with the ever-diminishing time available to get to net-zero?
Mark: Ultimately, we don’t want regulation to be a barrier to the market innovating and of course this is such a dynamic space that this innovation and adaptability is absolutely essential.
One principle that I would mention is that we need to go with the grain of the market rather than against it.
This means leveraging what the industry is already doing, being aware of other industry initiatives in this particular space and being sensitive to different business models and circumstances.
A second principle is balancing principles and prescription. Ultimately, there is likely to be a need for some level of prescription in the market in order to ensure consistency and comparability, particularly around information and disclosure.
“Ultimately, we don’t want regulation to be a barrier to the market innovating”
At the same time, there needs to be sufficient flexibility so that you don’t stifle innovation and codify in too much detail rules at a time when the market is still evolving, so getting this balance right between principles and prescription is important so as to ensure that adaptability going forward.
The third principle is around international consistency. We are operating in global markets and are looking at global problems, and therefore global solutions are paramount.
We need to promote international consistency, and align with international standards, frameworks, and definitions etc. as much as we can.
From the work we have been doing with TCFD, in the proposals that we have just consulted on for asset manager disclosures, we have really applied all three of these principles.
“We are operating in global markets and are looking at global problems, and therefore global solutions are paramount.“
Firstly, we are aligning with an international framework, TCFD. Secondly, we have proposed flexibility around the level of aggregation and consolidation at which an asset manager can report.
We need to ensure that those that operate a U.K subsidiary of a global business can capture the circumstances of its global operations, and we need to ensure that the regulations make sense for the business model.
We are also suggesting only a minimum level of prescription in terms of a set of core metrics, and then everything else is essentially aligned with the principles-based nature of the TCFD framework.
This is an example of applying what are quite core principles to ensure regulation does good and not harm.
Fund Operator: There are a number of private/public sector initiatives such as GFANZ – does the FCA see these initiatives as enough to steer us towards the policy objectives on climate?
Mark: It is incredibly important, and we very strongly encourage market led solutions in this space.
Initiatives such as GFANZ are particularly important because they represent a clear recognition amongst financial services firms that they are part of the solution.
We are now up to something around 80 trillion across 250 financial institutions who have signed up to GFANZ initiatives, and it is our job to ensure that the power of those commitments is ultimately realised.
The power will essentially come when you move from commitment to action in these initiatives, which means credible, achievable, transparent, and well governed net zero transition plans.
“We are now up to something around 80 trillion across 250 financial institutions who have signed up to GFANZ initiatives”
Within our TCFD implementation we are referencing TCFD guidance materials, and TCFD themselves, who have just consulted on guidance on transition planning.
As part of the proposals we put out, we have essentially suggested that that guidance should be part of the rules, with a guidance framework that ultimately operates for asset managers and issuers.
We have reference to this guidance in place, once those rules are finalised, but we do need to consider whether we need to do anything further beyond this around comparability of transition plans, and the governance associated with them to ensure that they do ultimately achieve the aim.
This is going with the grain of where the market is headed in terms of its own initiatives and ensuring that the regulatory framework delivers on those promises
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