ESG Investing  

Advisers warned not to disregard Europe's ESG rules

Advisers warned not to disregard Europe's ESG rules
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Advisers have been warned that Britain's departure from the European Union does not necessarily mean they are safe to disregard its new sustainable investing rules.

The EU’s regulation on sustainability disclosures in the financial services sector, also known as the SFDR, came into effect on March 10.

The UK government elected not to implement the regulation in legislation since Britain left the EU's regulatory umbrella at the beginning of 2021.

But experts have warned advisers that the UK government is considering implementing similar rules and that advisers should consider following SFDR regulation as good practice, even if it is not UK law.

Patrick Norwood, insight consultant at Defaqto, the regulation could be an example of good practice for advisers.

He said: “[We] think it should be good practice for financial advisers to understand their clients’ ESG requirements and be able to research solutions that would fit those.

“Even if [the regulation is] not law, it should be good practice and by following high standards it could be a competitive advantage.”

While the government chose not to implement the SFDR, the regulation would apply to advisers if they have clients living in Europe, according to adviser trade body Pimfa. Those with only UK clients, meanwhile, would not have to apply the regulation.

A Pimfa spokesperson said: “[Our] understanding is that the government will introduce its own version of the SFDR but we have no information on when that will be, whether it will simply mirror the SFDR or if it will differ in certain ways.”

They added: “[We] have no idea when this will happen and our expectation is that it will be at least a year before we see anything as always with such forms of legislation, there will be a consultation process, etc. first. So, we believe any requirement around sustainable finance is still some way off.”

The rules would have required advisers to ask clients about sustainability preferences in their suitability checks as part of the advice process.

They also require financial advisers to publish on their websites information about how they integrate sustainability risks into their investment or insurance advice.

In November chancellor Rishi Sunak announced the government’s plans for the financial services sector ahead of the end of the Brexit transition period.

The plans included the introduction of “more robust environmental disclosure standards so that investors and businesses can better understand the material financial impacts of their exposure to climate change, price climate-related risks more accurately, and support the greening of the UK economy”.

A HM Treasury spokesperson said: “[Last] year the chancellor announced the UK’s intention to be the first G20 country to make disclosures that are aligned with the recommendations of the Task Force on Climate Related Financial Disclosures fully mandatory across the economy by 2025.

“We are considering the requirements for legislation relating to the SFDR and will set out further details in due course.”