ESG Investing  

ESG regulations and their impact on advice

  • Describe the regulation that will affect advisers on ESG investing
  • Identify the questions you should be asking your clients
  • Explain what impact this will have on your advice proposition
ESG regulations and their impact on advice

There are regulatory changes afoot in the world of responsible investment, which are going to have a fundamental impact on the advice process. 

Since 2018, there have been over 170 ESG (environmental, social and governance) related regulatory measures proposed globally - that is more than the previous six years combined.

In 2018, the European Union also published a recommendation to make ESG investing easier across Europe.

This was through the European Commission making a formal request to the European Securities & Markets Authority (ESMA) and as a result we are about to see a raft of new regulations integrated into various directives which will drive ESG considerations further into the mainstream.

This all goes to highlight the scale of regulatory focus in this area. 

What’s going to change? 

Sustainability risk (the risk of fluctuation in the value of an investment due to ESG factors) is going to be integrated into MiFID II (Markets in Financial Instruments Directive), AIFMD (Alternative Investment Fund Managers Directive) and Ucits (Undertakings for the Collective Investment in Transferable Securities).

The amendments to AIFMD and Ucits largely focus around improving disclosure requirements from asset owners and asset managers, but it’s in the proposed amendments to MiFID II which will have the biggest impact on advisers.

Esma is proposing that firms take into account ESG considerations when complying with their existing organisational requirements (this covers firms’ processes, systems and controls, their risk management functions; and the processes to eliminate conflicts of interest) as well as considering ESG factors in the context of product classification too.

In addition and perhaps most significantly, Esma has also proposed changes to the suitability assessment. Firms will need to take into account their clients’ ESG preferences in assessing their investment objectives.

What this means for you 

The final rules and guidance are expected to be published later this year, and are expected to come into force will potentially come into force at some point in  the first half of 2021.

Remember that this is an amendment to MiFID II, not a brand new EU directive.

In addition, the FCA has indicated that it will seek to mirror the European initiatives in this area by implementing the rules and making the required changes to Cobs and asset managers are keen for consistency across the different local markets in this area of regulation.

In the UK, we have recently seen new regulations introduced by the DWP aimed at trustees of occupational pension schemes.

This largely centered on ensuring statements of investment principles are updated to reflect how ESG factors are taken into account within the investment decision-making process.

The DWP is going even further with new rules in October 2020 which will place more onus on trustees to disclose their engagement activities with asset managers.

There were also new rules which came into force in April from the FCA aimed at Independent Governance Committees which now requires IGCs to report on their firms’ ESG policies. All of this reflects a clear signal of intention from regulators and policymakers alike.


Please answer the six multiple choice questions below in order to bank your CPD. Multiple attempts are available until all questions are correctly answered.

  1. Which directive will advisers feel the biggest impact of ESG requirements?

  2. The FCA is likely to ignore any changes to legislation initiated from the EU, true or false?

  3. What is driving the move towards responsible investing?

  4. Changes to MiFID II mean that advisers will have to make ESG questions part of their client factfind, true or false?

  5. Which of the following is NOT question an adviser should think about asking a client?

  6. What happens if a client shows an ESG preference?

Nearly There…

You have successfully answered all the questions correctly, well done!

You should now know…

  • Describe the regulation that will affect advisers on ESG investing
  • Identify the questions you should be asking your clients
  • Explain what impact this will have on your advice proposition

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