The Financial Conduct Authority’s exec director of consumers and competition gave an interesting speech last week about diversity and inclusion in the context of assessing a firm’s culture. He highlighted the aspects that the regulator takes into consideration when assessing individual firms and whether they exhibit the “key characteristics of a healthy culture”. This is a relatively tricky topic to tackle as a regulator and one that can be incredibly divisive, depending where you sit on the political spectrum. But what exactly do we mean by “culture” and should firms go beyond making changes to things like remuneration policies to address it?
Given the increasing importance of environmental, social and governance (ESG) strategies within the capital markets, this topic seems to sit firmly in the “S” and the “G” components (a topic on which I’ve previously blogged). The FCA isn’t alone in its focus on the cultural question within capital markets. We’ve heard the Securities and Exchange Commission’s chair Gary Gensler talk about the subject during numerous discussions with House Financial Committee members of late. Street-side, not everyone is so keen on the regulatory interest in this area.
If we take Sheldon Mills from the FCA’s definition of culture, he indicates that the UK regulator is looking at three specific areas for its assessments: “purpose, people, leadership and governance”. While he admits that the regulator isn’t prescriptive about culture, the increased industry focus on ESG is likely to be setting standards for acceptability that regulators and the industry will hold firms to more rigorously in future. He also notes that “purpose” is a relatively nebulous term that is hard to assess from an external perspective but that it links to tangible items such as strategy and services.
If we look at purpose more closely, however, you do get into some muddier waters. At the face of it, the purpose of most firms in capital markets is to make returns for their clients or to provide a defined service for a fee. But if we bring ESG into the mix, shouldn’t firms also be keeping an eye on whether these investments negatively impact the environment or social aspects such as diversity? After all, banks have stated net zero targets themselves, for example. Does this obligation extend to the services they offer their clients and the investments they make? Where are the lines to be drawn between ESG practices at the entity level and ESG at the investment level?
It’s a tricky area and while no one (well, fewer people) would argue that remuneration and targets should be aligned to both financial and non-financial targets to encourage better risk decision-making and governance, how much you embed the values of ESG into your organisation is up for debate.
Mills did highlight areas such as supporting hybrid working to encourage corporate inclusivity as clear wins on the diversity and inclusion front. We rarely talk about it, but it’s worth remembering that the City of London is not a particularly disability-friendly place, for example. This flexible working aspect jars, however, with the “back to the office” mantra of some of the large banks over recent months (though some have since softened their approach).
I’ve written about how capital markets needs to change some of its cultural aspects to attract and retain existing and new talent in the future. Employees are asking more from their firms in terms of work/life balance and flexibility. But how we measure culture is likely to continue to provoke a lot of argument. If culture is a cornerstone of governance, maybe we should be factoring things like Glassdoor reviews into our ESG assessments?