Reporting and Governance

Although the EU might currently be leading the ESG regulatory race, Brexit could give London the agility, flexibility, and speed to eclipse the rest. By Ben Richmond, CEO and founder at CUBE

Amid rising concerns around climate change, environmental, social and governance (ESG) has become a top priority in the past five years. In fact, an estimated $120bn was poured into sustainable investments in 2021 alone, and with so much at stake, it is no surprise that regulatory bodies around the world are battling for the number one spot.

In the Queen’s speech in May, the UK government announced plans to revoke EU financial services regulations, allowing them to be tailored to the UK. This means that, while Brexit has stirred mixed opinions, it will provide the UK with a unique opportunity for the country to lead the ESG race, breaking free of the requirements of the EU’s regulatory framework and laying the foundation for one of its own.

Window of opportunity

The first sign of the UK boosting its competitiveness appeared when the Financial Services Bill announced a major delegation of power to domestic regulators. Cutting the EU red tape allowed the Financial Conduct Authority (FCA) to move away from the current ESG regulatory framework and foster an environment that positions the UK as an attractive place to invest and do business.

It is likely we will see a new wave of innovative regulations over the next six months as a result of this shift in power. The regulator is kicking things into high gear, and shows no signs of slowing down yet.

The devil of all financial regulation is in the detail, and that is precisely what the FCA should focus on in order to win this regulatory race. The EU’s current ESG regulations are complex, and mandatory regulations are futile, if no one understands how to comply with them. There are over 500 pages in the EU taxonomy alone, and it will be a long time before compliance teams can completely make sense of this regulation.

The FCA can learn from this. By drilling down into the detail and demystifying ESG regulation, it can boost confidence in the UK’s ESG market. Only then will the growing number of firms that are ESG-focused be motivated to remain in the UK after Brexit. The FCA has already introduced clearer regulatory guidelines with the rollout of the first mandatory reporting in line with the Task Force on Climate-Related Disclosures, and according to the FCA itself, there is plenty more where that came from.

However, as the race toward ESG regulation continues, and despite all the benefits of breaking away from the pack, global standardisation must not fall off the agenda. The UK will thrive from its own, clearer, ESG regulatory framework but cross-border collaboration must remain part of the equation.

If the FCA is to bolster the UK’s competitiveness for the long term, it is essential that it leads the way in establishing a regulatory framework that can be replicated and integrated globally. Not only does this emulate Brexit’s ‘global’ approach, but it positions the UK at the very centre of perhaps the most important financial movement in recent history.

Ultimately, regulation should be viewed as an enabler; and as the competitiveness of the UK’s financial sector is reliant on its ability to attract business from other financial centres, the FCA must use regulation as a competitive tool to bring this to life.

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