ESG has taken the spotlight over the past couple of years due to climate change concerns. In 2021 alone, there was an estimated $120bn poured into sustainable investments – and with so much at stake, it comes as no surprise that many are battling for the lead role.
In the late HM the Queen’s speech earlier this year, the government announced plans to revoke EU financial services regulations and replace them with rules which are “designed for the UK”.
Since, the FCA has in October launched its own consultation into Sustainable Disclosure Requirements (SDR) and investment labels. A clear divergence from the EU. This shows that, while Brexit has stirred mixed opinion, it is provided the UK with a unique opportunity to lead the ESG march as it is no longer required to follow the EU’s regulatory framework.
Perhaps the greatest indication of the transition of power to the domestic regulator, and the first sign of the UK looking to bolster the City’s competitiveness, was the announcement of The Financial Services Bill.
By cutting EU red tape, the FCA is diverging from the current lacklustre ESG regulatory framework and constructing one that makes the UK a more appealing place to invest and conduct business, while maintaining high standards.
With this newfound power post-Brexit, there will be a continued wave of innovative regulations over the next year, as we are seeing emerge with the latest SDR consultation paper.
The FCA said, in its own words, it “works to embed ESG considerations as a golden thread” in everything it does. The regulator is reciting its lines and people are listening.
The devil of all financial regulation is in the detail – and that is exactly where the FCA is starting in order to win the ESG race.
Currently, the EU’s ESG regulations are still complex and it is simply not enough to have regulations that are compulsory if no one understands how to comply with them.
There are over 500 pages in the EU taxonomy alone, and it will be a long time before compliance teams can completely understand and grasp how to abide by it.
Taking this on board, the FCA can make strides and take the floor: by drilling down into the detail, and demystifying ESG regulation, the regulator can lift confidence in the UK’s ESG market.
Only then will firms that are ESG-inclined be urged to remain in the UK after Brexit. We have already seen the FCA introducing clearer regulatory guidelines with the roll out of the first mandatory reporting in line with the Task Force on Climate-related Financial Disclosures (TCFD), then the SDR consultation, and the FCA’s made clear that there is more to come.
However, for all the benefits of going against the status quo, it is key that maintaining strong global standards is not lost.
Although it is clear that firms in the City will thrive from an ESG perspective with more detailed and clearer regulation, cross-border collaboration is still critical.
If the FCA is to maintain a long-term approach to the UK’s competitiveness, it is important that it leads the way in devising a regulatory framework that encourages international integration.
Not only does this exemplify Brexit’s “global” approach, but it will position the UK at the core of possibly the most important financial movement we have seen in our time.
Overall, regulation should be viewed as an enabler; and as the competitiveness of Britain’s financial sector is dependent on its ability to attract business from other financial centres, the FCA must use regulation as a competitive tool to bear fruit.
Ben Richmond, CEO and Founder of global SaaS RegTech CUBE