Supporting the development of sustainable finance is a key regulatory priority for the FCA, and it has already introduced and proposed related disclosure requirements in several areas. Its discussion paper (DP) begins the conversation on the extent to which additional regulatory expectations or guidance should be used to accelerate the move to sustainable finance for regulated firms.

The paper poses questions around how sustainability-related considerations should be embedded in regulated firms' objectives, strategies, culture, governance, operations, decision-making processes, incentives and senior managers' responsibilities. It also seeks to gather views on how the governance and resourcing of stewardship can be strengthened and where competence-related barriers in financial services may impede progress.


The FCA's considerations build on a variety of regulations already in place. Existing FCA rules require premium and standard listed companies and certain asset owners and asset managers to publish information on how they have incorporated climate-related risks into their governance and risk management processes, as part of their TCFD-aligned disclosures. However, through its proposed Sustainability Disclosure Requirements (SDR, see KPMG article here), the FCA is now exploring how to incorporate a much broader definition of sustainability-related risks — such as nature and biodiversity, human rights and modern slavery — into firms' governance and risk management frameworks.

Wider stakeholder initiatives are also underway. For example, the Transition Plan Taskforce's draft disclosure framework may raise the bar further for in-scope firms to maintain effective governance structures over their greenhouse gas emissions. The DP brings aspects of some of these initiatives together for industry consideration.

The FCA is also considering where it could build on broader regimes, such as the Senior Managers and Certification Regime (SM&CR) and the Consumer Duty. And while, to date, its sustainability-related requirements have focused mainly on regulated asset managers and asset owners, the focus has now shifted onto developing requirements for all regulated firms.

Potential changes to deliver sustainable change

The FCA's paper explores the potential for regulatory enhancements to support the embedding of sustainability considerations in various aspects of regulated firms' businesses. These can be grouped broadly into three themes:

1. Tone from the top

The FCA is exploring ways to integrate sustainability-related risks at all stages of the governance process — not only how firms set their strategic objectives, but also how culture can act as an enabler and how the effectiveness of firms' governance can be integrated into the regulatory framework. 

  •  Objectives, purpose and strategy: The FCA wants to understand whether firms are setting sustainability-related objectives and building these into their business models and strategies. The PRA already expects the boards of dual-regulated firms to understand how their firms are integrating climate considerations into their approach. The FCA seems to be considering both broadening the scope of firms that will need to consider such matters (i.e. beyond dual-regulated to all regulated firms), and extending these requirements beyond climate change to wider sustainability-related considerations.
  • Culture and behaviours: The FCA emphasises the importance of a healthy culture and asks whether it should set expectations on how firms' culture and behaviours can support sustainable change. It notes growing investor interest in disclosing and improving diversity and inclusion practices.
  • Governance: The FCA asks how firms are ensuring that they have the right skills and knowledge within their boards relating to climate-change and sustainability risks and opportunities, what are likely to be the most effective strategies for embedding these considerations in firms' operations, and how management information (MI) can be used to monitor developments and progress against public commitments. It is looking to gather views on whether regulatory guidance or expectations are needed in these areas.
  • Accountability: The FCA notes that, while the PRA already expects dual-regulated firms to allocate responsibility for managing financial risks from climate change to a Senior Management Function (SMF), there are currently no similar requirements for solo-regulated firms. The FCA asks whether more guidance is needed and which SMF would be most suitable to take on sustainability-related responsibilities.

 2. Sustainable products and directing capital

Firms can effect positive and sustainable change in their own business processes and can also play an important role in responsibly allocating, managing and overseeing the investments of their customers. The FCA is considering how further guidance and requirements could drive improvements in this area.

  • Product governance: The FCA notes that its existing product governance handbook (PROD) does not currently contain explicit references to sustainability, although SDR will require firms to maintain appropriate governance arrangements over in-scope products. The FCA asks whether specific expectations should be introduced around the governance of products with sustainability characteristics. Interestingly, the FCA specifically proposes clarifying the roles and expectations of fund boards.
  • Stewardship: Although there are existing requirements under the Shareholder Rights Directive, and certain firms must `comply or explain' in the context of the Stewardship Code, the FCA believes there are still barriers that prevent stewardship from taking a more prominent role in the investment approach. The paper seeks views on whether further measures are needed to encourage effective stewardship, whether there are any regulatory barriers, and whether additional measures would encourage firms to identify and respond to market-wide and systemic risks. For a deeper look at trends driving the increasing focus on stewardship reporting, see KPMG's latest article here.

 3. Workforce management, competence and incentives

Effective delivery of sustainable business objectives does not just rely on top-down governance. The FCA is seeking to understand the extent to which regulatory expectations can facilitate the incentivisation of workforces and greater competence to deliver effective sustainability-related strategies.

  • Remuneration and incentives: Existing codes require remuneration to promote effective risk management, including ESG risks under the MIFIDPRU Remuneration Code for in-scope firms. The FCA is seeking to understand the extent to which regulatory expectations can support firms in incentivising their staff to deliver effective sustainability-related strategies and how remuneration can be linked to sustainability-related metrics. It asks which matters firms should take into consideration when designing remuneration and incentive plans linked to their sustainability-related objectives, and what further guidance could be needed.
  • Training and competence: The FCA is concerned that the ability of staff to drive positive sustainable change could be constrained by knowledge gaps and `competence washing' (i.e. a lack of sustainability-related subject matter expertise). It therefore seeks views on:
    •  The main sustainability-related knowledge gaps and how they can be addressed.
    •  The need for additional training and competence expectations.
    • Aspects of training that would be particularly useful.
    • Whether stakeholders have seen misrepresentation of ESG credentials and the potential harms.

Comparison with existing EU requirements

To some extent, the questions raised by the FCA suggest that it might consider introducing requirements that cover similar ground to existing EU rules that have applied to UCITS Management Companies, AIFMs and MiFID investment firms since 2022. These require firms to integrate sustainability risks and factors into their investment processes, decision-making, risk management, resourcing considerations, due diligence and conflicts of interest management.

Additionally, EU MiFID investment firms must understand and incorporate `sustainability preferences' into their investment advice and suitability processes, and consider sustainability factors and risks in their product governance frameworks. In its SDR consultation, the FCA announced plans to consult on rules for financial advisers to incorporate sustainability matters and investor preferences when delivering investment advice.

Looking ahead

This DP indicates a willingness on the part of the FCA to consider significant changes to existing regulatory regimes to facilitate a transition to sustainable finance, and an openness to introducing new regulatory requirements to help realise the necessary changes to all aspects of a firm's business. As well as exploring the possibility for new requirements, the FCA specifically encourages firms to consider reflecting the matters discussed in their approaches to governance, remuneration, incentives and training.

Firms should therefore seek to understand the extent to which their existing sustainability-related strategies and business processes could be enhanced by the proposals in the paper. Firms can start to prepare by considering how existing governance structures may need to be adjusted, how all three lines of defence can factor the FCA's considerations into forward-looking work on this topic, and where upskilling is particularly needed or resources need to be increased.

Although there is uncertainty around how the FCA's considerations could translate into future requirements, in some areas enhancements to the UK regime could be progressed more quickly to respond to some of the questions posed. This could particularly be the case where similar requirements already exist in the EU, considering lessons learned. But in any case, firms will need to prepare to navigate any differences between UK and EU regimes.

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