ESG is creeping into client conversations

ESG is creeping into client conversations
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The lack of an obligation for UK advisers to specifically ask clients about their sustainability preferences is among the consequences of the country’s departure from the EU.

The Financial Conduct Authority confirmed in a statement to FTAdviser that there is currently no specific requirement to include questions on environmental, social and governance investing in the advice process.

But the concept of ESG investing is hard to deny. Research from Aegon found two in five advisers (41 per cent) saw more requests for ESG investments from clients.

And in its statement the regulator added that under its know your customer requirements, questions about investors’ ESG preferences could form part of the fact-finding process. “This would help to ensure that any recommendations did not conflict with those preferences,” it says.

Guy Rainbird, public affairs director at the Association of Investment Companies, says ESG and climate change are “featuring strongly” in the investors’ minds.

“We're aware that many advisers are proactively raising the issue of ESG or ethical preferences with clients,” he adds.

Stuart Carswell, a director at Pareto Financial Planning, says that asking a client about their views on ESG is as “fundamentally important” as ascertaining their risk profile, capacity for loss and volatility.

“Like or loathe it, ESG is here to stay,” Carswell says.

According to compliance consultancy TCC Group, it has seen an increasing number of advisers incorporate ESG investments into their centralised investment propositions.

But David Boyhan, TCC Group’s technical director, adds: “While this is all great, a common issue we have noticed is ESG being included but not properly embedded in the KYC process.

“For example, firms might just have a tick box that shows whether the client is interested in ESG investments, but won’t dig into the detail about what specific aspect the client wishes to focus on, or equally whether they would be happy to invest in an ESG fund even if it doesn’t perform as well as other funds might.”

Boyhan warns that not having adequate KYC information could negatively impact suitability and therefore client outcomes. “That’s when the FCA will start to become concerned,” he says.

A January survey of advisers by Invesco found just over half (51 per cent) said they ask investors the single binary question, ‘Would you prefer to invest sustainably or not?’

Pareto's Carswell says most clients will probably want to invest in a socially responsible way if they are asked such a simple, binary question. “If you add that this could be at the expense of return or volatility, the answer could be different.”

Paul Chilver, an associate and financial planning manager at Birkett Long IFA, agrees that it cannot just be a question to tick a box.

“Each client will have their own personal view on ESG and therefore advisers need to ask follow up questions.

“For example, I have clients who have an interest in funds that aim to fund solutions to the climate crisis, while other clients are wanting to invest in funds that screen out certain areas, for example tobacco.