Avoiding the ESG compliance trap

From the Financial Conduct Authority's Cobs 9A to the consumer duty, there are many existing rules and regulations around good advice, which include the need to communicate the ESG investment option to clients, says Lee Coates, director of compliance firm ESG Accord.

In a webinar during Good Money Week in October he said if there is one thing advisers should be certain of it is that they cannot make assumptions about a client’s ESG preferences.

They should also not expect a client to raise the topic with them, as research has shown many people are interested in ESG but a large number do not know about it. 

The FCA has made it clear the consumer duty carries the need to ask clients if they are interested in ESG.

In a speech at the UKSIF Good Money Week conference Yasmin Raza, the FCA's manager of ESG market intelligence and engagement, told advisers the regulator's work on ESG and its new consumer duty were "really aligned" and essentially sustainability disclosure requirements are "about placing consumer needs at the very core of the regime".

She also spoke of an "unprecedented capital reallocation and disruptive changes” in the coming years, as the country moves towards a net-zero economy, which would "look very different" from the current economy.

You will hear more from us in the coming months.Yasmin Raza, FCA

She made it clear the regulator expects firms to focus on delivering good consumer outcomes, "and not just to focus on ticking boxes”, when it comes to ESG.

“One thing that we're very well aware of at the FCA is that many consumers actually really want to be part of that positive change,” she said. “And we found this through interviewing consumers ourselves.”

She went on to say the FCA was actively discussing advisers’ future role in helping investors navigate the sustainable investments market, telling them “you will hear more from us in the coming months."

So, how can advisers avoid the ESG compliance trap?

The most recent FCA Financial Lives survey found 23 per cent of adults were aware of responsible investments and 62 per cent of investors were interested in ESG.

This suggests more clients may be interested in sustainable investing than advisers may think, but many may not know about it and therefore could not raise the topic with the adviser themselves.

“If an adviser is making an assumption about what the clients want, then that's very dangerous territory,” says Coates. 

“When we hear the statement ‘my clients don't want ESG’ we want to find out quite quickly whether [they’ve] asked every single one in the context of consumer duty around explaining and educating clients and none of them want it, [which is] absolutely fine, or [it’s a case of] ‘they never mentioned it so I don't mention it and therefore I've assumed that clients are not interested at all’. So that's very dangerous.”