mars 23 2023

The UK Financial Conduct Authority publishes a discussion paper (DP23/1) on finance for positive sustainable change


Other Authors     Oliver Williams, Trainee Solicitor

The UK Financial Conduct Authority (the "FCA") recently published its Discussion Paper (DP23/1) on 'Finance for positive sustainable change' ("DP23/1") as part of its ongoing effort to promote sustainable finance and align the financial sector with the UK's environmental, social, and governance ("ESG") goals. DP23/1 draws on the Task Force on Climate Related Financial Disclosures ("TCFD") recommendations1 and considers how regulated firms' governance, incentives and competence can support sustainability-related objectives.


DP23/1 seeks to identify ways in which the FCA, by encouraging an industry-wide dialogue on sustainability factors, can support the growth of sustainable finance and ensure that through regulatory foundations and appropriate guardrails the financial sector, with its oversize role in driving sustainability more generally, delivers positive ESG-related outcomes.

As part of the publication of DP23/1, the FCA published a companion piece blog post by Sacha Sadan, FCA Director of ESG, which explores the importance of starting a discussion between regulated firms around evolving practice areas of interest and of feedback from firms on how investor stewardship can be incentivised and governed. Mr Sadan refers to closing the "say-do gap" as being crucial in this regard as momentum moves away from mere commitments to real action.

An FCA employee confirmed this approach during a seminar on the FCA's ESG and greenwashing strategy on 28 February 2023, noting that the purpose of DP23/1 was to "start the discussion" on how firms can most effectively embed ESG-related considerations in order to deliver their sustainability goals.

DP23/1 is split into two parts:

  1. chapters 1 to 5, which consider how regulated firms' governance, incentives and competence can support sustainability-related objectives. Specifically:
    1. embedding sustainability-related considerations into a firm’s culture and strategy; and
    2. how training and competence in suitability can support these goals

    This section includes a number of examples of industry best practice, whilst also identifying specific areas where "knowledge gaps" exist.

  2. chapter 6, which sets out a collection of 10 articles authored by external experts, each addressing an aspect of the topics set out in chapters 1 to 5. The FCA note that such articles, whilst not expressing the view of the FCA, are provided to encourage debate and prompt discussion underpinning the purpose of DP23/1.

DP23/1 sets out a number of factors which it believes are key to the broader discussion, which it hopes will be engaged in by firms in advance of the response deadline. Amongst other things, this includes: a consideration of 'competence washing' (in which firms' overstate their ESG expertise); a reflection on asset managers, their regulatory obligations (and possible additional regulation) in relation to sustainability; a consideration of executive pay and individual accountability; and a consideration of the Market Abuse Regulations ("MAR") and how it might act as a barrier to collaboration. We set out a below a more detailed look at a selection of these key factors.

Executive pay, individual accountability and sustainability

A key area of focus in DP23/1 is how executive pay and the introduction of individual accountability can be harnessed to promote sustainability. The paper acknowledges that executive pay is a contentious issue and that many stakeholders believe that pay structures should reflect ESG factors. The FCA is seeking feedback on whether it should encourage listed companies to include ESG metrics in their executive pay policies, the pragmatism of trying to apply such metrics, and whether it should require companies to disclose these metrics to their shareholders. Similarly, the FCA is seeking input on the greater focus of individual accountability of senior executives in relation to sustainability failings.

Such conversations, which are not new and are not unique to the UK ESG context2, are similar to the recent guidance issued by the United States Department of Justice (the "DOJ") in the context of corporate criminal enforcement, which was explored in our September 2022 update. In that context, the DOJ identified a corporation's compensation structure as a key area in which prosecutors will assess a corporate compliance programme, with the expectation being that the compensation will be structured so as to encourage compliance and disincentivise wrongdoing. In the same guidance, the DOJ noted that individual accountability of wrongdoers would continue to be focus of any DOJ investigation.

As newer ESG-related concerns begin to crystalise and align with more established compliance concerns, companies should take note of: (i) the policies and compensation structures adopted; and (ii) the ways in which firms respond to the greater focus on individual accountability in light of the DOJ guidance (which are already being implemented by affected companies) for a preview of what ESG-related changes to compensation schemes and governance structures may look like in the future.

Market Abuse Regulations or competition rules

DP23/1 also briefly addresses concerns which have been raised by investors about barriers to collaborating with others in relation to sustainability or ESG-related best practice or concerns, due to fears of being caught by the MAR and/or competition rules.

One key concern is that the MAR can be interpreted to prevent the sharing of non-public information related to ESG issues. For example, if two companies are collaborating on a joint sustainability initiative and one of them shares non-public information with the other, this could be seen as insider trading under the MAR. Similarly, some firms are concerned that the MAR makes it difficult to engage in public discussions on ESG, given the obligation to disclose inside information that may have a material impact on their share price.

These concerns were previously raised by the FCA in a discussion paper and subsequent feedback in 2019 and the FCA alludes to forthcoming clarity on this matter to ensure that the MAR does not inhibit engagement between firms.

Next steps

DP23/1 is an important step in promoting sustainable finance and aligning the financial sector with the UK's ESG goals. The paper identifies several key areas of focus, including executive pay and individual accountability and seeks feedback on how the FCA can support the growth of sustainable finance. Stakeholder firms are instructed to provide feedback by 10 May 2023 on the questions set out in Annex 1 of DP23/1. The FCA notes that they will use the feedback to establish the direction their future regulatory approach will take to the issues raised, and encourage firms to reflect on the matters raised in DP23/1so as to consider implementing, where appropriate, changes in the interim.

1See our previous updates on TCFD recommendations here and the approach of other regulators in the UK here.

2See for example, our blog posts on the European Financial Reporting Advisory Group's draft European Sustainability Reporting Standards here and here.

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