Regulation: a route to an investible economy

Businesses and their boards need to monitor constantly regulation and the policy that drives it. The UK has a good record of effective regulation, good corporate governance, clear transparency requirements, and its monitoring and enforcement regime. As such, it has always enjoyed an influential voice in global capital markets. To achieve this, the UK has strived to set high standards at home and engage in robust regulatory diplomacy across the world to promote a consistent and proportionate approach, which are important to achieve cost-effectiveness for all participants in the ecosystem.

With the establishment of the International Sustainability Standards Board (ISSB) and the publication of its standards, the regulatory environment for sustainability reporting has evolved. The ISSB Standards enable disclosure by companies of consistent and comparable information on the financially material risks – and opportunities – inherent in a business, presented in a fair, balanced and understandable way. This, in turn informs investors when making decisions on investment opportunities.

Clearly, some regions have chosen their own regulatory paths – we have seen that in both the European Union and the US – although there are efforts to secure interoperability. As a result, achieving a global passporting arrangement that allows companies to report once using the ISSB Standards, rather than a myriad of local regulations, could help to direct capital to sustainable and resilient business.

The panel suggested that it is essential not to lose sight of what really matters: the strategic importance of sustainability reporting to a business and the clear identification of financially material risks and opportunities.

Governance is part of UK business DNA

Along with standards and the policy landscape, effective UK corporate governance – as we know it today – is an important aspect of what makes UK business investible. The historic collapse of business empires at the start of the 1990s, the Cadbury Report (on the Financial Aspects of Corporate Governance) that followed and all the subsequent enquiries into governance and business ethics have enabled the emergence of a robust regime for oversight, with non-executive directors at its heart.

Good governance enables a focus on the longer term – important to asset owners – and on companies doing well because they care about where the ball will land; not only where it is located today. Companies that achieve long-term success care about climate, as well as about brand, health and safety, local communities and wider impacts.

The concern of many people both within and outside the company is the share price. However, non-executive directors are about governance and the long-term strategic health of the business. Their role includes understanding what a financially material risk to the business looks like and how the business might prevent the risks of harming the planet, how externalities might threaten the business model, and about asking the right questions – in the context of regulation and policy – to mitigate those risks as well as bank identified opportunities.

The power of regulation

The FCA’s regulatory approach aims to ensure that market participants manage the risks of moving to a more sustainable economy, as well as the risks from a changing climate. It also champions the harmonisation of global standards to promote open, interoperable and resilient markets.

The FCA has just consulted on the application of UK SRS – the UK endorsed version of the ISSB’s standards – to listed companies. The framework is grounded in financial materiality, supporting the disclosure of decision-useful information for investors.

But it is not all about rules, it is about helping companies to navigate the future. For example, the FCA clarified that certain statements made in prospectuses can now be designated as ‘protected forward-looking statements’.

An end to too much, too fast thinking

Recognising that for some companies reporting against sustainability frameworks and transition planning is new, taking stock and reporting on financially-material risks is key.
We’re going through change in the sustainability reporting ecosystem, and it takes time to adjust. The same was true of international financial reporting standards when they were introduced in the early 2000s; it’s only natural that sustainability standards will take time to bed in.

Connectivity is an important factor. Integrated thinking is the way forward. This includes combining the risk register and the sustainability register into one.
Where should boards focus?

The focus for boards should be building the business, including setting the right culture, figuring out the opportunities and ensuring the business fundamentals are sound. Asset owners want to know boards are on top of all these areas, in addition to oversight of financially material risk.

There is a huge opportunity for companies to differentiate themselves through reporting – including by enhancing trust – and for boards to ensure that there is appropriate oversight and controls of the reported information. Reporting should result in decision-useful information – and therefore should focus on ‘table stakes’ matters, not lists and minutiae.

Above all, good companies know which limited number of strategic drivers of value and risk they should be reporting on and do exactly that. Credit rating agencies, investors, regulators and markets at large will celebrate this and in turn it can lead to rewards.