WHAT THE REGULATOR MUST DO
The Financial Sector Conduct Authority is working on a roadmap to support sustainable investing in SA
Scenes of heavy smog, dead cattle and crops, poisoned water sources and people eking out a living as waste-pickers are not commonly found in presentations made to financial sector regulators. Generally, the Financial Sector Conduct Authority (FSCA) deals with statistics and trends to identify risks and put in place measures through regulation and supervision to manage them.
Yet such stark images bring home the very tangible impacts of climate change, environmental degradation and social inequalities around the world, including in SA. The need to address these risks is of everincreasing importance and requires all those involved, including financial sector regulators, to consider the roles we have to play.
Since its formation as part of the Twin Peaks regulatory architecture in 2018, the FSCA has placed great emphasis on its role in steering the financial sector to produce the best possible outcomes — for the economy and for the customers it serves.
Our role in relation to consumers is relatively simple, namely, to put in place frameworks and rules to ensure that financial institutions are fair in their treatment of customers; that financial products and services are designed to meet customer needs, are transparent and understandable; and that the customer’s voice is heard and addressed when problems arise.
However, ensuring the best possible outcomes for the economy is a more nuanced consideration. The financial sector is a linchpin in driving economic growth and development. One of the key roles it should play is in efficiently and effectively allocating capital.
More and more, questions and concerns are being raised about whether the sector is performing this role in a way that sufficiently supports the societies it operates in. For one thing, customers are increasingly asking questions about how their money, held in pension funds and other savings vehicles, is being used not just to produce financial returns but also to support sustainable future outcomes for the societies they live in. Corporates are also under pressure to demonstrate their contributions towards imperatives such as the UN sustainable development goals and commitments to net zero carbon economies.
It is within this context that financial sector regulators worldwide are assessing the role they have to play in making sure markets meet this need and operate efficiently and cost-effectively in delivering these outcomes. There will be serious long-term consequences if the market does not function properly.
For the FSCA, supporting the real economy by not just managing risks but ensuring that markets allocate capital effectively to attain better societal outcomes is a multifaceted issue. It requires considerations of factors far beyond those that are typically in the purview of financial sector regulators.
For example, how can products that claim to meet environmental, social and governance objectives be assessed to ensure that they are fairly delivering on these very technical outcomes — whether it’s the reduction of carbon emissions, transitions to greener technologies or addressing structural inequalities? How do we ensure investor protection that balances financial returns with measurable nonfinancial objectives? And how do we best keep pace with innovation and the rapid pace of change?
Globally, there is a strong focus on strengthening climate-related financial disclosures and green finance taxonomies. The aim is to ensure that markets acquire the necessary data and information to allow for wellinformed decisions to be taken by investors. Standardising the data will go a long way towards supporting comparability and the flow of funds to contribute to climate change-related outcomes.
In SA the Climate Risk Forum (CRF), chaired by the National Treasury, was formed in 2020, bringing together financial sector regulators, policymakers and industry representatives to develop a joint approach to meeting the country’s net zero target.
Two critical aspects emerging from the CRF are the development of a “green taxonomy” — to define which investments and assets are green — and the provision of technical guidance for disclosures. This guidance is based on international best practice as developed by the Task Force on Climate-related Financial Disclosures. Taking into account the output from the CRF, financial sector regulators such as the FSCA will consider publishing guidance on a green taxonomy and disclosure framework, which will form the basis of future regulatory requirements for the industry.
But more focus must be given to other sustainability objectives, particularly in the SA context. The country aims for a “just transition”, acknowledging that any efforts to address the challenges of climate change cannot come at the expense of social considerations like the protection of vulnerable citizens and of incomes. We should also asses how we can use investment funds in our economy to achieve these sustainable outcomes.
As regulator, the FSCA must continue to ensure that markets have enough depth and breadth to facilitate the full array of funding mechanisms required. Market participants can and should manage the risks of moving to a more sustainable economy and capture opportunities to benefit customers.
The FSCA is working with all parties to increase our local financial sector capability rapidly to respond to social and environmental challenges, including through relevant regulatory guidance and oversight. That means producing a roadmap for the sector this year that will set out our approach to supporting sustainable finance and investment in SA.
More focus must be given to attain other sustainability objectives, particularly in the SA context