ESG investing is worth billions and post-Brexit rules should give Britain a headstart
The EU has been cast as one of the leaders in the ESG regulatory race. But Brexit could give London the agility and flexibility to eclipse the rest.
In the last few years, ESG has taken centre stage. In 2021 alone, there was an estimated $120bn poured into sustainable investments – and with so much on the line, it comes as no surprise that many are battling for pole position.
Last month, the government announced plans to revoke EU financial services regulation and replace them with rules which are “designed for the UK”. Taking the controversies of Brexit in itself out of it, we have a unique opportunity to lead the ESG race now it is free from the EU’s regulatory framework.
Under the Financial Services Bill, domestic regulators would be given a major delegation of power as Britain looks to promote the City’s competitiveness. By cutting EU red tape, the FCA can diverge from the current lacklustre ESG regulatory framework and construct one which makes the UK a more attractive place to invest and do business, while maintaining high standards.
With this newfound power post-Brexit, there will be a new wave of innovative regulations over the next six months as the FCA, in its own words, “works to embed ESG considerations as a golden thread” in everything it does. The regulator is shifting gear and there’s little sign of slowing down.
To recover lost ground, the FCA needs to start in the detail. As it stands, the bloc’s ESG regulations are incredibly complex; it’s simply not enough to have regulations that are mandatory if no one understands how to comply with them. There are over 500 pages in the EU taxonomy alone, and it’ll be a long time before compliance teams begin to understand the full scope of the impact of this regulation.
With this, the FCA can break away and take a lead position: by drilling down into the details, and demystifying ESG regulation, the regulator can boost confidence in the UK’s ESG market. This will encourage firms with strong ESG strategies to remain in the UK after Brexit, and bring European firms over to us.
From April this year, the UK became the first country with legal requirements for climate-related financial disclosures. As part of their mandatory reports, more than 1,200 financial institutions will also have to publish details of their action to mitigate climate change – and their exposure to risk. The FCA has taken this in its stride, and introduced clearer regulatory guidelines.
For all the benefits of breaking away from the pack, there is also a benefit in standardisation. Firms in the City will thrive from an ESG perspective with more detail, but these companies exist on a global level and will look to decrease the operational burdens by working within similar regulatory frameworks.
The FCA must have a firm eye to Britain’s competitiveness, but it also needs to lead the way in creating a system conducive to international integration.
Brexit meant we left the EU, but it also means London needs to work harder to prove our place as a global city. ESG is a race companies are raring to win; we should make sure we’re the city at the finish line.