New FCA rules connect dots between ESG investment and EU Shareholder Rights Directive transposition

The Financial Conduct Authority (FCA), the UK regulator, has updated its handbook of rules and guidance to transpose the EU Shareholder Rights Directive II (SRDII) into national law.
The EU directive’s stated aim is the “encouragement of long-term shareholder engagement” and introduces requirements, more than rights, for shareholders – although all on a comply-or-explain basis.

Life insurers and asset managers must disclose information annually on how their published engagement policies have been implemented

Coinciding with the EU directive’s transposition deadline, the FCA rules are effective from 10 June. From that date, asset owners and asset managers are required to disclose their engagement policies and investment strategies.
In particular, the FCA said in the Statement Policy explaining the changes, life insurers and asset managers must disclose information annually on how their published engagement policies have been implemented.
“However, we recognise that the rules come into effect quickly after publication. So, for an initial period, a firm can comply with the relevant rule by explaining what it is doing to develop an engagement policy,” the FCA wrote.
The FCA said the rules are a “copy-out” of the directive requirements, with one exception. It has proposed to extend the rules to investments in shares traded in comparable markets outside the European Economic Area, which is the geographical scope of SRDII.
According to the FCA, the rulemaking’s success should be considered in the “wider context of the promotion of effective stewardship” which ultimately means that institutional investors “will be increasingly held to account for their long-term investment strategies and stewardship activities.”Part of that wider work, the FCA pointed out, are the “several sustainable finance workstreams underway, which are closely related to our work on stewardship”. Among those workstreams, the FCA lists the Discussion Paper entitled ‘Climate Change and Green Finance’ published in October 2018. The FCA will publish a feedback statement “in due course”, addressing stakeholder responses about what areas the regulator should focus on.
In addition, the FCA mentions the Climate Financial Risk Forum, a joint initiative with the Prudential Regulation Authority, as well as the pilot Green FinTech Challenge launched in October 2018 with nine firms to develop green finance innovation.
The FCA is also consulting on additional ESG duties for Independent Governance Committees (IGC) of contract-based workplace pensions. The consultation closes on 15 July and rules will be drafted by Q4 2019.
The rules on IGCs complement the changes to the Occupational Pension Schemes Regulations 2018, announced last year by the Department for Work and Pensions (DWP), clarifying that ESG factors are among the financially material considerations that trustees should take into account.
The DWP is responsible for the areas of the Directive that affect trustees of occupational pension schemes.
Lastly, another piece of the SRDII’s regulatory jigsaw is the ongoing review of the Stewardship Code, whose consultation draft introduced expectations for signatories to factor in material ESG issues as part of their stewardship responsibilities. The Code is scheduled to be published this summer.

For more on this topic…
Developments in ESG in European regulation will be discussed in a dedicated panel at next week’s RI Europe. For the full agenda, see here