How regulation will help ESG reach its full potential
I was excited to join the FCA as its first ESG director last year. It’s a great opportunity to use my investor experience to help the financial sector move to a more sustainable future. Whether its climate, biodiversity, supply chains or diversity and inclusion, there’s lots to get stuck into.
Consumers are also excited about ESG – our latest Financial Lives data shows that 81 per cent of adults surveyed would like the way their money is invested to do some good as well as provide a financial return.
And according to Bloomberg, we should expect the pool of assets under management with an ESG mandate to reach $50tn by 2025, from $35tn last year.
On the one hand, it’s been great to see a sector I’ve worked in for years now really reach the mainstream. Employees also care passionately. But the last year has brought some undeniable challenges – whether it’s banks in Germany being raided over greenwashing allegations; senior figures in the sector publicly questioning its value; or a steady stream of allegations that ESG products simply don’t live up to the wide claims made.
There’s a real risk of trust in the sector being eroded. If that happens, consumers’ excitement will turn to cynicism. And that will undermine all the progress that ESG can achieve.
So it’s our job, as the regulator, to make sure that trust and transparency are front and centre.
That’s doesn’t mean making value judgements about what people invest in. Some consumers are happy to invest in companies that are on a journey to being more sustainable. Some only want to invest in companies which have already got there, and some don’t care. And others still are more interested in the “S” and the “G” than the “E”.
Our goal is that firms and consumers know what exactly they’re investing in. We ask those selling ESG products to communicate in a way which is “fair, clear, and not mis-leading”. That’s just what we ask of any financial product. Our new Consumer Duty also sets that firms need to deliver good outcomes for retail consumers.
We’ve already introduced climate disclosure requirements for listed companies, as well as asset managers and owners. (And yes, we also published our own climate disclosures – we’re more than happy to walk the walk). We continue to work with international partners on the next steps here.
And we warned firms who exaggerate the sustainable characteristics of their products and services, writing to their Chairs last year.
In October, we published our proposals for the labelling of sustainable products. These will be key in helping consumers understand what they’re investing in. We’ll make sure that products which call themselves sustainable actually are. And we’ll ensure there’s easily digestible information for consumers on what the product is claiming to do.
We’ve worked closely with industry and consumer groups on these – and we were excited to share them.
Labels will be a big help for ordinary investors. But the ESG sector needs to support firms as well. That’s why we’ve said there’s a case for regulating ESG data and rating products. We’re now working with the Treasury on how to make this happen.
And we don’t want to develop rules in isolation – that would increase costs for businesses as well as increase the risk of regulatory arbitrage. So we’re working closely with our partners internationally. We want consistent international standards – but we also don’t want to wait, our own regime should be a foundation for others, helping to raise the bar.
The next few years are going to continue to be both exciting and challenging for sustainability. But I’ve really enjoyed getting stuck in so far, and I – and the rest of the FCA team – can’t wait to see what’s next.