ESG Investing  

Advisers must have an ESG process in place for clients

Advisers must have an ESG process in place for clients

The term environmental, social and corporate governance was first coined in 2005 in a landmark study entitled Who Cares Wins.

Today, ESG investing is estimated at more than $30tn (£23tn) in assets under management or around a quarter of all professionally managed assets around the world, and its rapid growth builds on the socially responsible investment movement that has been around, in one form or another, since the 1960s.

Growing public awareness of the climate crisis, especially during the lockdown period, has turbo-charged sales of ESG funds. Between April and June this year alone, funds investing according to ESG principles saw inflows of more than $71bn globally as investors look for sustainable business models that can withstand market shocks, such as Covid-19.

In fact, the move towards ESG appears to be very heavily client-driven. A recent survey of 200 UK financial advisers found 85 per cent had seen an increase in client requests to allocate capital to ESG-integrated funds since the start of the coronavirus outbreak.

And eight in 10 advisers (82 per cent) said they expected the current crisis would result in more clients investing in pursuit of ESG goals in the future.

Yet, despite this, the actual business of advisers introducing ESG principles and practices to new investors is still in its infancy.

Recent research showed considerable educational work still needs to be carried out among advisers as nearly half (47 per cent) were unaware of mandatory Mifid II changes that require they make the ESG needs of their clients part of their suitability processes.

In future, at the very least, advisers will need to be able to demonstrate they have a process in place should a client ever be interested in ESG investments. And, if they fail to comply when regulations pass next year, they could find themselves under scrutiny by the Financial Conduct Authority.

This is a growing global trend. Since 2018, there have been more than 170 ESG-related regulatory measures proposed worldwide – more than in the previous six years combined.

Notably, the Alternative Investment Fund Managers Directive and Undertakings for the Collective Investment in Transferable Securities will see sustainability risk integrated into new rules and guidance, with added transparency requirements that aim to aid investors. This is expected to be published later this year, coming into force in 2021. 

The language used, and differing interpretations of the principles involved, produce inconsistencies and it is unclear at the moment exactly how the regulatory landscape will evolve, although we believe that this should be principles-based rather than rules-driven.

It is with these considerations in mind, along with unprecedented interest from our membership, that Pimfa – in conjunction with our partner Morningstar – has launched the Pimfa ESG Academy; a free learning resource for members, so that we can provide a solid foundation for advisers and wealth managers as the process matures.