The discussion paper aims to encourage industry-wide dialogue on sustainability related-governance, incentives, and competence.

By Anne Mainwaring, Sara Sayma, and Dianne Bell

On 10 February 2023, the FCA published DP23/1: Finance for positive sustainable change: governance, incentives and competence in regulated firms.

The FCA considers that a firm’s governance, purpose, and culture are central to how it embeds environmental and social considerations into business, risk, and capital allocation decisions for the benefit of consumers. With this in mind, the FCA is seeking views on how it can move effectively beyond disclosure-based initiatives to help and encourage firms as they develop their arrangements for governance, incentives, and competence in the area of sustainability.


Against the backdrop of changing societal expectations of companies in all sectors and various ESG-focused frameworks and initiatives, the FCA recognises that many firms have already integrated material sustainability-related risks, opportunities, and (in some cases) impacts into their business, risk, and capital allocation decisions. In a field where there are many initiatives are taking place, the FCA aims to narrow this field and help with highlighting good, evolving practices.

The FCA is committed to developing “a policy approach to ESG governance, remuneration, incentives and training/certification in regulated firms”. Using the feedback received from the DP, it will consider if introducing additional regulatory expectations in this area will effectively promote positive change.

The DP references the FCA’s, the PRA’s and the Bank of England’s work on diversity and inclusion (D&I) in the financial sector (see Latham’s blog post on the FCA’s latest D&I report). The FCA notes that this DP seeks feedback on a much wider scope of issues and that this compliments its more targeted work on D&I.

Request for Feedback

The consultation period under the DP closes on 10 May 2023.

The FCA will use the consultation feedback to consider what the industry would find most helpful in this fast-evolving area and to consider what direction the future regulatory approach should take. Accordingly, the consultation includes questions on whether the FCA should:

  • introduce additional regulatory measures to encourage effective stewardship, particularly in relation to firms’ governance and resourcing of stewardship, and associated incentive mechanisms and conflict of interest policies;
  • set new regulatory expectations or guidance regarding senior management responsibilities for a firm’s sustainability-related strategy, including delivery of the firm’s climate transition plan;
  • introduce specific regulatory expectations and/or guidance on the governance and oversight of products with sustainability characteristics, or that make sustainability-related claims — for example to clarify the roles and expectations of governing bodies such as Fund Boards.

In considering the direction of the future regulatory approach, the FCA notes that it will consider proportionality and whether it should differentiate between firms on the basis of size (or other characteristics) when deciding the most appropriate course of action.

The FCA is focused on whether firms have environmental or social objectives, how their policies and strategies reflect these objectives, and how firms design their approaches to governance, remuneration, incentives, training, and competence, to deliver effectively on these objectives.

The FCA highlights that many firms’ policies in this area are currently focused on climate change. The DP seeks feedback on how firms are dealing with the breadth of sustainability topics, encompassing both environmental and social matters, therefore reflecting the growing trend to extend to the “S” and the “G” of ESG. 

Subjects for Discussion

The DP is divided into two parts.

The first part considers:

  • how the Task Force on Climate-related Financial Disclosures (TCFD), the International Sustainability Standards Board (ISSB), the UK’s Transition Plan Taskforce, and the Glasgow Financial Alliance for Net Zero (GFANZ) consider governance, incentives, and competence.
  • how firms embed sustainability-related considerations into their objectives and purpose, and how these considerations then feature in firms’ culture, business, strategy, governance, and incentive arrangements. The FCA explores how remuneration can help to drive the effective delivery of firms’ sustainability approaches.
  • with a particular focus on asset managers and asset owners, how the governance and organisation of investor stewardship can be structured to influence positive sustainability outcomes. The FCA noted that, whilst collaborative investor engagement is an important tool to influence positive sustainability outcomes, investors continue to raise concerns about barriers to collaboration due to fears of falling foul of Market Abuse Regulations or competition rules. The FCA is exploring whether further clarification in these areas would be helpful to encourage collaborative engagement.
  • training and competence on sustainability in regulated firms, in particular looking at good industry practices, the areas where knowledge gaps arise today and whether further regulatory measures are necessary to help deal with them. The FCA emphasised the importance of firms developing subject matter expertise. The DP states that firms should avoid “competence washing” in an effort to improve their ESG performance — they need to build genuine capabilities.

The second part includes a collection of articles written by external industry experts to encourage debate by providing different perspectives on aspects of governance.

Our Reflections

Although much of the DP is framed as the start of a discussion, the FCA notes that it will in parallel be considering firms’ arrangements as part of its supervisory engagement. The FCA also encourages firms to reflect on the matters discussed in the DP and consider as appropriate, incorporating them as they review and refine their current approaches to governance, remuneration, incentives, and training.  

In this context, the FCA gives the example of ESG and stewardship, including the role of product governance bodies in overseeing ESG and sustainability integration in investment processes, which the FCA notes is a prominent theme in its recent Dear CEO Letter on asset management supervision strategy.

The FCA notes that the analysis in the DP may encourage firms to review their practices, even without setting further regulatory expectations”. In light of this, firms may want to begin assessing the practices and frameworks that they currently have in place, even before the FCA gives an indication of its finalised rules and guidance in these areas.