The Financial Inclusion Centre has submitted a response to The Financial Conduct Authority (FCA) Discussion Paper DP23/1 Finance for positive sustainable change: governance, incentives, and competence in regulated firms.
The submission can be found here: FCA DP23 1 finance for sustainable change FIC submission final
As we argue in our major policy report The Devil is the policy detail – will financial regulation support a move to a net zero financial system? | The Financial Inclusion Centre the current approach to financial regulation will not be sufficient to align financial market behaviours with environmental and social goals. The UK financial sector continues to finance, at scale, economic activities which harm ‘people and the planet’. Financial institutions which do so are not being held to account.
The main issue on the environmental side is that protecting the environment from finance is not given anywhere near the same status in regulation as other objectives such as protecting consumers, maintaining financial stability, market integrity, preventing money laundering or the financing of terrorism. We argue that financial regulators should be given a primary statutory objective in relation to climate change underpinned by a comprehensive robust set of policies to change the behaviours of financial institutions.
On the social impact side, much stricter criteria on the definition of social impact or social sustainability are urgently needed to prevent social impact washing. Preventing social impact washing | The Financial Inclusion Centre
There is a significant amount of work needed to align financial markets with environmental and social goals. Addressing governance, incentives, and competence in regulated firms could play an important role.
But, it is very important that the FCA and other regulators do not rely on a market led approach or try to incentivise change. Regulatory interventions aimed at encouraging positive behaviours and cultural change do not have a good track record in other areas of financial markets. There is little reason to expect that this approach will be that effective in realigning financial market behaviours with respect to environmental and social goals. Disclosure aimed at exposing adverse behaviours and practices along with tough regulatory interventions will be needed to constrain market practices that continue to cause environmental and social harm.