How regulation can help ESG realize its full potential

As the first ESG Director for FCA last year, I was thrilled to be a part of it. It’s a great chance to use my investor experience in helping the financial sector transition towards a more sustainable future. It doesn’t matter if it’s climate, biodiversity or supply chains, diversity and inclusiveness, there are many things to do.

Consumers are also excited to hear about ESG. Our latest data on Financial Lives reveals that 81 per cent of adults surveyed want their money to be used for good, in addition to providing a financial reward.

Bloomberg estimates that total assets under ESG-mandated management will reach $50 trillion by 2025 compared to $35 trillion last year.

It was great to see my sector, which I have worked in for many years, finally become mainstream. The staff is passionate about their work. The past year has been fraught with challenges. German banks have been accused of greenwashing, senior figures in the sector have questioned its value, and there has been a steady stream claiming that ESG products don’t live up the broad claims.

There is a real danger of losing confidence in the sector. Consumers’ enthusiasm will soon turn to cynicism if this happens. This will impede all the progress ESG can make.

As regulators, it is our job to ensure transparency and trust are at the forefront.

This does NOT mean that we should judge the value of what people invest. Some consumers will be happy to invest in companies on the way to becoming more sustainable. Some people just want to invest in companies already established. Others don’t care. Others are more interested in letters “S” or “G” than they are “E”.

Our goal is for consumers and businesses to be able to see exactly what they’re investing in. ESG products must be communicated in a fair, clear, and not false manner. This is what we expect from all financial products. The new Consumer Duty requires that companies deliver quality outcomes to retail customers.

We have already implemented climate disclosure requirements both for listed companies and asset managers as well as owners. (And yes, we’ve also posted our climate disclosures—we’d love to go along the way.) We are still working with international partners to determine the next steps.

We warned companies not to exaggerate the sustainability of their products and services. Last year, I wrote to their chairs.

Our proposals for sustainable product labeling were published in October. These will be crucial in helping consumers understand what they’re investing in. We will ensure that products that claim to be sustainable are actually sustainable. We will also ensure that consumers have easy to understand information about the product’s claims.

These are the results of close collaboration with industry and consumer groups.

These labels will be a huge help to ordinary investors. Corporate support is also needed for the ESG sector. We believe that regulation of ESG data is necessary. We are currently working closely with the Treasury Department to find out how to do this.

We don’t want rules to be developed in isolation. This would increase costs and the risk of regulatory arbitrage. So we work closely together with our international partners. We want uniform international standards, but we don’t want to wait. Our system must provide the basis for others to raise the bar.

The next few decades will be exciting and challenging, but they will also be a challenge for sustainability. But I have enjoyed the snag so much, and I – along with the FCA team- cannot wait to see what comes next.