Shining a light on ESG and sustainable business

Adam Gates, Becky Mackarel and Richard Plaistowe from our Financial and Professional Services practice on doing the right thing in the face of yet more regulation – the Consumer Duty.

On the evening of Thursday 23 November 2023, we were delighted to host an event at our 20 Cannon Street headquarters. Attendees had the opportunity to network over drinks and enjoy some fine dining – and to discuss some of the challenges financial and professional services firms face around Environmental, Social and Governance (ESG) and other sustainability issues.

“Shining a light on ESG and sustainable business” took as its starting point the relationship between Consumer Duty and Culture within financial services firms. But given the roundtable nature of the event and the knowledge and curiosity of our high-calibre guests, questions and debate ranged far beyond the specific implications of Consumer Duty (the higher standards of consumer protection introduced by the Financial Conduct Authority).

That made a lot of sense considering the Duty was brought in with a view to driving broader cultural change as well as to eradicate specific shortcomings. In a speech earlier this year, Emily Shepperd, FCA Chief Operating Officer and Executive Director of Authorisations said that the higher standard of the Duty and the shift to focusing on customer outcomes will require a significant change in many firms’ cultures. “Firms’ boards and senior management, if they haven't already, will have to embed a culture in which good outcomes for consumers is central. People management policies and practices, including performance management, pay and bonuses will be critical to doing so.”

She added that firms can expect at every stage of the regulatory lifecycle to be asked to demonstrate how their business model, the actions they have taken, and their culture are focused on delivering good customer outcomes. So, how best to evidence this to the regulator?

Our guest speaker, Tracey Groves, Partner, Sustainable Business & ESG Advisory Practice (Regulatory, Compliance and Investigations) at DWF offered six key practical actions for embedding best practice: 

1. Assess and evaluate how culture and people policies work in practice and how they promote behaviours aligned to Consumer Duty.
2. Clearly define the organisation’s purpose, strategy, values and behaviours in a way that aligns with the principles of Consumer Duty.
3. Empower leaders to role model the right behaviours throughout the organisation - including incentives and remuneration plans.
4. Put in place effective training, communication and collaboration channels to encourage dialogue with employees, customers and governance leads.
5. Build a channel for issues to be raised and acted upon to enable effective governance.
6. Review accountability and reinforcement frameworks to optimise ownership and responsibility.

Tracey’s colleague Robbie Constance, DWF’s Head of Financial Services Regulatory, also spoke at our event, and provided some illuminating insight into the regulatory regime from a legal perspective. Yet while all of this was appreciated by our audience, at the same time it became clear from the roundtable discussion that some fatigue around regulation had set in. ‘Here we go again’ was a conversational motif.

“Unfortunately, what happens is the regulation comes down and it's generic,” says Tracey. “It asks things of organisations which are disproportionate to their size, and then it becomes a burden and a compliance activity rather than a strategy or integrity opportunity.”

While rules and controls are of course necessary to set boundaries and put guardrails in place, too great a focus on them can become a distraction from running your business. But if integrity is a defining characteristic of the leadership team and embedded across the business, firms are far likelier to do what they say they are going to do, putting them on the right side of the regulator and thereby building resilience in the face of more regulation.  Additionally, it is important to measure the impact of corporate behaviour and the manifestation of integrity in day-to day-operational decision-making, and how much it aligns with purpose and stated behavioural aims.

In this light – and we are, after all, shining a light on sustainability – financial and professional services firms stand to gain by adopting a pragmatic mindset in which cost of compliance is reframed as an opportunity cost and perhaps even a differentiator. “It's an opportunity to demonstrate how integrity is being applied,” adds Tracey. “Through your purpose, through your strategy, through your values and the decisions that you make; the consumers that you service, the people that you employ, the society within which you operate. Ideally, companies should be thinking of their business strategy as a sustainability umbrella that drives not just financial prosperity, but social and human prosperity.”

This is important because regulation is not going to slow down – if anything, not only will it continue but its impact is going to be far more wide-reaching and permeable to business operations. The EU’s Corporate Sustainability Due Diligence Directive (CS3D) is unparalleled in its scope and will, once implemented, impose an extensive corporate governance duty on many companies based in and outside the EU. Unlike most other ESG obligations currently in force, this will not be a ‘comply-explain’ obligation, but a ‘comply or be liable’ obligation. It will require action beyond mere reporting, and it comes with regulatory, civil enforcement and compensation mechanisms – including maximum fines of up to 5% of net global turnover and impacts on Directors’ bonuses.

CS3D requires companies to look at the adverse impacts of their own activities, and those of their subsidiaries and across their value chain on both the environment (including climate) and human rights. Not only is CS3D looking for businesses to identify, prevent, minimise, mitigate and cease adverse impacts (and potential adverse impacts) of both environmental AND human rights factors, it also specifically demands a climate transition plan. This will present serious challenges to small and medium-sized enterprises (SMEs) who are part of larger companies' supply chains and will be required to produce data and evidence to this effect. 

There has been some resistance to the inclusion of the financial sector in CS3D, led by some French banks, but this appears to be waning. On 5 December, France’s biggest bank BNP Paribas issued a statement welcoming the plan to legislate as an essential step in establishing a level-playing field at regional level.

This will have come as music to the ears of the EU and the European Central Bank. In a keynote speech delivered in November, Frank Elderson, Member of the Executive Board of the ECB said: “For private finance to be able to effectively support the green transition of the real economy, it is crucial that regulatory and legislative changes are consistent across sectors. In other words, in the absence of clear reasons to the contrary, which I fail to see, financial undertakings should not be treated differently from other companies.”

The writing is therefore on the wall. Here we go again, indeed.