Building an ESG friendly advice process

4 min read 19 Nov 21

Unless you’ve been living in a cave recently, you can’t have failed to have noticed the huge focus on ESG off the back of the COP26 conference (and if your cave is at or near sea level, then I’m afraid I’ve got some really bad news for you…)

While the great and the good were gathering in Glasgow attempting to save humanity, the FCA got in on the act and issued a discussion paper inviting views on potential criteria to classify and label investment products’ sustainability characteristics. And buried reasonably deep down on page 28 of the 35-page document, the Regulator posed a question that could, over time, have a big impact on adviser conversations with their clients and how they make suitable recommendations.

In my view, the whole ESG debate within financial services is often more complicated than it should be. If your starting position is that climate change is an undeniable fact (and if it isn’t, you should probably do more research) and that we as a species have caused it, then you quickly end up realising that we need to do something to stop it, and pretty urgently too. The investment industry, with over £9 trillion assets [1] managed in the UK alone, must play a hugely important role in attempting to reverse the damage that has already been done.

But I don’t think that should be via specialist ESG investing – it needs to become business as usual. Surely a key part of mainstream investing is for asset managers to identify firms that have a sustainable future and are not going to cease to exist and become stranded assets for whatever reason. I’d expect all asset managers to invest in firms with strong governance and social policies in place. Unfortunately, while some asset managers have baked ESG factor assessment into their investment process as standard, it’s not yet the norm.

While our ESG research last year found that the vast majority of people want to protect the environment and improve society and hold corporates to account to do so, this doesn’t seem to be translating into widespread changes in investment behaviour. Our latest State of the Adviser Nation survey, which gathered the views of over 450 advice professionals, asked how many clients raise the issue of ESG and sustainable investing themselves, as opposed to having the conversation stimulated by the adviser. The results show a mean average of 14%, with the mode being 10%, so around 1 in 10 clients currently are asking unprompted questions about ESG investing.

For ESG investing to move from specialist to mainstream, it seems the push of legislation might be required, rather than the pull of consumer demand. And the direction of travel set out in the FCA discussion paper seems to indicate that regulation is on its way. This paper has a lot of sensible and constructive suggestions. Most notably improving data quality and labelling to ensure consistency, making it easier to compare options and giving consumers a fighting chance of being able to make an informed judgement.

The FCA wants consumers to have enough information to assess which products meet their needs. It is also making it clear that it aims to hold firms to account for their sustainability claims. Given the fact that ESG has become a catch-all phrase to cover a range of investing approaches, any improvements in this space are likely to be welcomed by advisers.

Perhaps less welcome is the suggestion that “advisers should consider sustainability matters in their investment advice and ensure their advice is suitable and reflects consumer sustainability-related needs and preferences”. On one hand, clearer guidance as to exactly what the regulator expects in this space will be welcome but introducing a new area for advisers to assess when ensuring suitability is easier said than done.

As well as clarifying what advisers need to do, the regulator will need to ensure there are genuine improvements in disclosure and the availability and consistency of data, as well as outlining where the balance of responsibility actually sits. How much of the responsibility to invest sustainably sits with advisers and how much with asset managers? Should advisers influence the asset management sector to invest in this way, or should the asset management sector be mandated by legislation to do so?

The good news is the FCA activity is at a relatively early stage – this discussion paper will lead to a further consultation and eventually some updated rules. We’ll keep you informed as this discussion progresses, and if you have any views you want to share with the Regulator, comments can be submitted until 7th January 2022.

[1] – Source: The Investment Association

[2] – https://www.fca.org.uk/publications/discussion-papers/dp21-4-sustainability-disclosure-requirements-investment-labels