PIMFA
Policy and Regulation
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BENEFITS OF ENVIRONMENTAL, SOCIAL, AND GOVERNANCE REGULATIon
- Will produce a common transparent way to compare environmental, social, and governance (ESG) Products
- Will reduce the risk of investors being misled by greenwashing
- Will allow investors to make a more informed decision on their financial investments and the impact that they will have on the environment
- Will improve investors decisions when addressing social governance
- Will help reduce the worlds carbon footprint
- Will allow investors to align their financial goals against their environmental objectives
- WHAT PIMFA IS WORKING ON?
- Future regulatory regime for ESG ratings providers
On 30 March, HM Treasury (HMT) published a consultation on regulating ESG ratings. Recognising that growing reliance on unregulated ESG ratings can raise risks that can impact the performance of investments and the credibility of the sustainable investment market, HMT considers there is clear benefit to be gained from improving the transparency of methodologies, governance, and processes of ESG ratings providers. HMT proposes that the direct provision of an assessment of ESG factors to a user in the UK, where the assessment is used in relation to a specified investment in the Regulated Activities Order (2001), unless an exclusion applies, be brought into regulation.
The consultation seeks views on initial policy proposals and does not include settled positions or proposed legal drafting, which will be worked up using input from this consultation, if HMT decides to pursue regulation for ESG ratings providers. The consultation closed on 30 June 2023.
- FINANCE FOR POSITIVE SUSTAINABLE CHANGE
On 10 February the Financial Conduct Authority (FCA) published the discussion Paper: “Finance for positive sustainable change: governance, incentives and competence in regulated firms (DP 23/1)“, which aims to encourage an industry-wide dialogue on firms’ sustainability-related governance, incentives, and competence. The FCA is looking to help narrow this fast-evolving field where there are many initiatives and help highlight good practices if finance is to deliver on its potential to drive positive sustainable change.
The first part of the discussion paper examines how governance, incentives and competence are considered in the Task Force on Climate-Related Financial Disclosures (TCFD) recommendations, and how expectations in these areas are evolving with the work of the International Sustainability Standards Board (ISSB), the Transition Plan Taskforce (TPT) and the Glasgow Financial Alliance for Net Zero (GFANZ). The second part includes the commissioned articles which may help firms to reflect on how their approaches to governance, incentives and competence support positive change.
- Sustainability Disclosure Requirements FRAMEWORK
Sustainability Disclosure Requirements (SDR) bring together new and existing sustainability reporting requirements for business, the financial sector and investment products.
- Regulation so far
- FCA finds further work required to fully embed ‘Guiding Principles’ for ESG and sustainable investment funds
The FCA has published a review which sets out findings from the regulator’s supervisory work that looked at how Authorised Fund Managers (AFMs) comply with existing regulatory requirements and expectations on the design, delivery and disclosure of Environmental, Social and Governance (ESG) and sustainable investment funds. While progress has been made, the FCA has found that many firms still have further to go to meet its expectations, particularly around the disclosure and clarity of information being given to retail investors and consumers. The FCA expects firms to address the good and poor practices outlined in the report to meet the requirements of SDR and the Consumer Duty. The regulator review found evidence of good practice, such as the development and use of appropriate ESG and sustainability scoring systems and benchmarks and also highlighted good practice where AFMs conducted thorough due diligence on third party data providers. The FCA has found examples of poor practice including:
- Products were inconsistently aligned with their ESG and sustainability goals even if they referenced them in their name.
- In some instances, fund holdings appeared inconsistent with a fund’s ESG or sustainability objectives, and some AFMs weren’t able to explain how these investments fit with their goals.
- Key ESG and sustainability information was often not explained, put into context or included in disclosures, meaning relevant information was not immediately or clearly accessible to investors.
- The design of AFMs’ stewardship approaches did not meet the FCA’s expectations. It was often difficult to identify the exact aim of the stewardship activities, how the activities were aligned to fund objectives, and examples of the progress they made against those aims.
Firms are expected to assess how they are meeting the FCA rules and guidance in relation to their ESG and sustainable investment funds. This will also be a useful exercise to prepare for the proposed SDR and investment labels regime.
- the Financial Conduct Authority's ESG STRATEGY
Published in November 2021 the FCA’s ESG strategy sets out their ESG targets and the actions they expect to take to deliver these. The aim is to support the financial sector in driving positive change, including the transition to net zero.
- THE TASK FORCE ON CLIMATE-RELATED FINANCIAL DISCLOSURES
The Task Force on Climate-Related Financial Disclosures (TCFD) was created in 2015 by the Financial Stability Board.
Working in conjunction with Alpha FMC, a specialist management consultancy for the Wealth and Asset Management industries, we have developed a TCFD guide to support Wealth Managers with publishing their TCFD report(s) for the first time this year or for those looking to improve their existing reporting for the future.
