The taxonomy launched by the European Commission’s Technical Expert Group on sustainable finance in June can be used to establish the relative ‘greenness’ of funds based on their contribution to one of the six EU environmental objectives.
Similarly, in the UK, the Investment Association launched an industry-wide consultation in January, looking at ESG labelling for investment funds.
The move to greater standardisation is helpful for two reasons:
- It should mean that it becomes easier for advisers to be sure about the different approaches being taken by investment houses that are integrating ESG factors; and
- It should also become easier to match clients’ preferences to products.
More important though, is the future regulatory requirement for advisers to incorporate sustainability preferences into the advice process.
In January 2019, the commission published draft rules on how investment companies should take sustainability issues into account when providing advice to their clients.
These include amended delegated acts under Mifid II.
The European Securities and Markets Authority passed its final technical advice back to the commission in April.
Sensibly, Esma has adopted a principles-based approach rather than offering up precise requirements, but advisers will still have to think hard about how they will manage this.
You have some time, as it will make about another 18 months or more for the requirement to become law (with the usual caveats therefore about the potential changes to the UK’s approach to EU regulation) and Esma has also emphasised the principle of proportionality with respect to national regulators’ implementation of the new rules.
Nevertheless, the tone of the regulatory mood music is clear, and advisers would be wise to start responding now, rather than leaving it late in the day.
Growing demand
That also makes good sense from a business perspective.
Climate change is becoming more evident.
Consumers are becoming more aware and advisers will need to respond to these changes by providing different investment options and by ensuring that their investment offer reflects the changing shape of economies – across the energy, transport, utilities and retail sectors.
Millennial consumers in particular are driving the change.
Social impact consultancy DoSomething Strategic’s 2018 report Survey of Young People and Social Change found that 40 per cent of young people have chosen to stop buying from a company if the company stood for something or behaved in a way that did not align to their values.
This trend is already evident in the investment world.
A Morgan Stanley survey found that 84 per cent of millennials say their central goal for investing is with a focus on ESG impact.
Millennials are also more likely to look to financial advisers to get the right advice.
