Skip to main content

FCA starts the discussion on how governance and culture can drive sustainable change

At a glance

  • On 10 February, the Financial Conduct Authority (FCA) published a Discussion Paper (DP) on how governance, incentives and competence in regulated firms can help drive progress towards sustainability objectives, and how firms need to embed sustainability throughout their broader culture and remuneration frameworks.
  • Sacha Sadan, the FCA’s Director of Environment, Social and Governance (ESG) also wrote a blog alongside the DP setting out how the regulator expects firms to consider these issues and challenging the industry to move from well-meaning commitments to real action.
  • The DP includes 10 articles from 10 independent industry practitioners, academics, and thought leaders (including Deloitte) demonstrating that the FCA see this as an opportunity to engage with a broad range of stakeholders to help find solutions, rather than automatically assuming that new rules and guidance are needed.
  • The immediate action for firms is to have a credible plan to achieve sustainability objectives and targets, and culture and governance frameworks to support that plan with clear roles and responsibilities for delivery and progress against metrics.
  • Firms should look at these issues alongside changes to culture and governance to integrate the Consumer Duty and other regulatory updates, including measures to implement sustainable disclosures and fund labels, and to safeguard against greenwashing.
  • To show market leadership, firms should also think ahead of how they will modify their plans, governance and culture to adapt to a broader range of ESG objectives and targets in the medium to long term, such as biodiversity, nature preservation, how their actions affect communities and human rights.

Relavent to:

CEOs, Chief Sustainability Officers, Chief Strategy Officers, Board members, Risk/Compliance functions and COOs across financial services firms.

On 10 February, the FCA published a DP on Finance for Positive Sustainable Change: Governance, incentives, and competence in regulated firms. Highlighting how the FCA puts governance at the heart of its new Consumer Duty, the DP looks at how financial services firms can enhance their governance and culture to lead and support the transition to a more sustainable economy.

To encourage debate and provide different perspectives, the DP includes 10 articles written by industry practitioners, academics, and other thought leaders. The FCA draws on the insights contained in these articles throughout the DP. Deloitte was delighted to contribute an article to the DP, which identified seven key areas of focus for firms to develop a culture that supports their climate and sustainability-related objectives. You can read a summary of our article in our blog and the full article in the DP.

The FCA expects firms to be accountable for their sustainability-related claims and commitments. It clarifies that for firms to make progress towards their sustainability objectives, their governance arrangements, incentives structures and capabilities, and culture must evolve and keep pace with the broader ESG agenda.

The DP addresses the “E” and “S” in ESG. While the focus of the DP is undoubtedly on climate change and meeting climate commitments, wider environmental issues, such as nature and biodiversity, are also referenced. In terms of the “S”, the FCA focuses most on diversity and inclusion (D&I), not only as a relevant social consideration, but also an enabler of good governance. We expect social issues to increase on the ESG agenda over the longer term, such as how financial services activities affect communities and human rights.

We believe that firms should pay particular attention to their culture in relation to climate and sustainability. This blog provides an overview of some of the key messages in the FCA DP.

Key points from the FCA Discussion Paper

Consumer expectations – the importance of purpose

From its Financial Lives Survey, the FCA highlights that 79% of consumers think that firms have a broader social responsibility beyond their objective to make profit. This indicates that consumers may make decisions which consider the extent to which a firm meets such objectives.

To enable firms to demonstrate how they are meeting these consumer expectations, firms should look at how they use culture and governance to meet sustainability objectives at the same time as they consider broader regulatory issues to show that they have a holistic and coordinated plan on social responsibility. For example, we would encourage firms to consider the content of the DP at the same time as they are refining processes and accountability to incorporate the new Consumer Duty, diversity and inclusion reporting, and broader sustainability initiatives, such as the FCA’s proposals on sustainable disclosures, fund labels and an anti-greenwashing rule.

Robust governance and accountability – focus on management information (MI) and senior management responsibilities

Governance arrangements are expected to be part of the way that firms facilitate meeting their sustainability targets and objectives, and the FCA is clear that it expects firms to be considering these issues already as part of reporting under mandated Taskforce for Climate-related Financial Disclosure (TCFD) rules. Governance will also be a key part of how firms deliver their transition plans under the proposed framework by the Transition Plan Taskforce (TPT) and to demonstrate compliance with standards set by the International Sustainability Standards Board.

The FCA emphasises the importance of firms having a credible plan for how they will achieve sustainability targets, when they will reach those targets (with interim milestones), what robust data and metrics they will use to measure progress, and who will be responsible for delivery. The FCA states that firms may need to revise their MI systems.

It indicates that roles and responsibilities should be clear so that the key individuals are held accountable for meeting sustainability targets and suggests that incentives, including remuneration as set out in its Dear Chair to Remuneration Committee letter last year, could be linked to the success of meeting those targets.

Healthy corporate culture – culture as an enabler

Culture is set out as an enabler to improve operational performance and, therefore, drive progress towards sustainability objectives. The FCA clearly sees healthy corporate culture as vital in delivering against any strategic plan, and firmly underlines the Financial Reporting Council (FRC) expectation in its Corporate Governance Code that Boards and executive management set the tone from the top.

It also draws on the importance of culture when showing how a firm meets the new Consumer Duty, and this overlaps with broader environmental and social issues within sustainability themes, such as human rights, D&I, biodiversity and climate transition. This highlights again that firms should look at these issues together and try to find efficient solutions to meet all of their obligations that protect consumers and show how they approach social responsibility issues in a coordinated and joined-up way.

Product governance and design – FCA seeking feedback on sustainability in its product governance expectations

In its DP, the FCA states that it expects all firms making sustainability-related claims about their products and services to maintain appropriate governance arrangements in line with the expectations in the product governance sourcebook. It also underlines the need for firms to ensure that products are labelled appropriately – in support of its proposals on sustainable disclosure requirements and investment labels published in October last year.

However, the FCA is also seeking feedback on whether there is a need for specific regulatory expectations and/or guidance on product governance and oversight in relation to sustainability, especially for governing bodies, such as Fund Boards.

Remuneration and incentives – soft targets or metrics “could amount to little more than greenwashing”

The FCA believes that well designed mechanisms to link progress on sustainability-related commitments to a measurable proportion of pay could play a role in encouraging individuals to take accountability for positive change. As set out earlier, it made its expectations clear in its letter to Remuneration Committee Chairs last summer.

However, soft targets or metrics that could be perceived as not challenging enough (e.g. health and safety –related measures that cover meeting statutory requirements), can lead to executives being paid extra just to do their “day job” and it could amount to little more than greenwashing. It also highlights the risk of including too many metrics which might lead to the link between performance and pay becoming diluted and meaningless.

Furthermore, the FCA states that firms may want to consider sustainability-related performance measures, that are within employees’ influence and control, for their wider workforce or for certain staff.4. Capital adequacy assessment

Investor stewardship – appropriate accountability and effective management of conflicts of interest

The FCA is clear that investor stewardship can play an important role in influencing positive sustainability outcomes. While noting the progress made by the industry, in a joint DP with the FRC (DP19/1) and the subsequent feedback statement (FS 19/7), the FCA nevertheless found that firms’ governance arrangements might not place sufficient value on effective stewardship. The FCA wants to see appropriate accountability for stewardship in line with firms’ investment approach, as well as effective management of conflicts of interest in relation to stewardship.

Training and competence – addressing knowledge gaps

In the DP, the FCA highlights the need for genuine capability building across the financial sector. Training the Board, employees, and in some instances third-party contractors, is seen as a key part of integrating sustainability objectives and targets into firms’ strategy, business, and operations.

The FCA draws on existing frameworks, such as the Green Finance Education Charter and skills and competencies required from other jurisdictions, to consider whether it may need to modify its training and competence requirements on firms. The objective behind the FCA’s concerns is to ensure that firms have the capacity and expertise to deliver sustainability objectives. The number of courses on ESG issues has grown significantly, as has in-house training within firms. The focus of the FCA is on whether there are any gaps and whether training is being rolled out to all stakeholders, including Board members.

The FCA believes that knowledge gaps, including failing to identify interdependencies between sustainability issues, may hinder firms’ abilities to make informed decisions. In terms of knowledge gaps, the FCA highlights key areas as ESG data and metrics, key definitions (e.g. “responsible investment”), and a lack of expertise across sustainability topics (e.g. an expert on environmental issues is not necessarily an expert on social issues).

Where the FCA is seeking input from firms

The FCA is seeking feedback on some substantive questions, including on areas where it might introduce further rules and guidance, the themes of which focus on:

  • whether firms have embedded environmental and social objectives, particularly within broader company policies and strategies;
  • how firms then use governance, remuneration, incentives, training and competence to deliver their sustainability objectives;
  • what challenges firms face in using the above to deliver on sustainability and how those gaps can be filled; and
  • concluding whether further rules and guidance are needed to make the FCA’s expectations clearer and to enable firms to adapt, or whether alternative methods may be more appropriate.

The FCA also asks for specific feedback on how asset managers and asset owners are using governance to deliver effective investor stewardship.


The FCA has issued this DP to encourage the industry to work with it to improve how the “G” in ESG is used to deliver sustainability, and to improve awareness of good practice. In parallel, the FCA indicates that it will look at firms’ existing approaches to these issues through its usual supervisory engagements. The deadline for contributing to the DP is 10 May 2023, and we anticipate the FCA will publish its findings in a feedback statement later this year.

To demonstrate that they comprehend and are in control of this broad agenda, firms should evidence how they join together various regulatory initiatives. Relevant here is showing how they use culture, governance and remuneration/incentives to ensure that the Consumer Duty, the range of sustainability measures and broader social issues (such as D&I, and the management of biodiversity and nature risks) are integrated, embedded and governed effectively. Firms need to have a credible plan for this, with clear lines of accountability and measurable targets.