Proportionate and balanced regulation has a central role in setting out standards and expectations on sustainability and climate-related goals and can drive positive change. That’s why an open dialogue between our industry and the Financial Conduct Authority (FCA) on the shape of the future UK regulatory framework for sustainable finance is essential if the UK is to achieve its net-zero targets and remain a globally competitive investment management hub.
In its recent discussion paper, Finance for Positive Sustainable Change: governance, incentives, and competence in regulated firms, the FCA has looked to initiate an early-stage conversation about how the regulated finance sector is equipping itself for the broader sustainability challenges we face now and those to come.
See also: – FCA should not ‘impose regulatory guardrails’ on sustainability too soon
While we fully agree with the need for proportionate and balanced accountability around the delivery of investment managers’ objectives and commitments, including those related to sustainable investment, further regulation of investment management firms on sustainability-related matters is not appropriate at this time for a number of reasons outlined below.
Sustainable investment is an area that is developing rapidly, and it is important we ensure we are operating in an environment where there is flexibility and room for evolution and innovation. Given firms’ different business models and strategies, adopting additional or more prescriptive rules – and particularly a one-size-fits-all approach – to how firms embed sustainability within their own businesses would stifle innovation, damaging not only the UK’s ability to achieve its net-zero target, but also its international competitiveness.
The importance of promoting international competitiveness, enabling a cross-border industry, and supporting innovation and evolution within investment management are all key pillars of our joint and shared aims in support of global financial stability and the positive impact our industry could and should be making.
Trying to apply rules in one jurisdiction, when firms operate and invest across borders will only serve to limit opportunities for growth and innovation, both to the detriment of investors and the broader drive for greater sustainability.
Moreover, pre-existing and forthcoming regulation already sets out robust standards and expectations and provides the FCA with the necessary tools to take action against firms or individuals deemed not to be meeting those standards. Given that current regulation and that already coming into force is sufficient, any further regulation is not only unnecessary, but may also damage the UK’s international competitiveness.
Under the FCA’s rules on TCFD, investment managers are required to make disclosures across key pillars of governance, strategy, risk management, and metrics. In order for members to report on TCFD in a meaningful way, sustainability considerations across these areas will have to be embedded across a firm’s operations.
Pre-existing regulation is also particularly clear in relation to product governance through the FCA Handbook, and this is reinforced by the forthcoming ‘anti-greenwashing rule’, as proposed in the FCA’s 2022 consultation on Sustainability Disclosure Requirements and Investment Labels. The Consumer Duty already introduces a more outcomes-focused approach to consumer protection and sets higher expectations for the standard of care that firms give customers. It is important that time is given for these regulations to be implemented and bed in before additional regulatory expectations or guidance is considered.
Reaching net zero is a journey and regulation can play a role in helping firms achieve this aim, however the regulator must not lose sight of the equally important goals of boosting innovation and global competitiveness – vital ingredients to ensure our industry continues to thrive and that we can become a world-leader for green finance.