InvestmentsSep 27 2021

ESG is creeping into client conversations

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ESG is creeping into client conversations
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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.

“An adviser must also be able to explain the differences between E, S and G, as clients may not necessarily know.”

Jamie Smith, a financial adviser at Foster Denovo, says when speaking with clients there is clearly still some “air of confusion” around what ESG investing actually means.

“Our role as advisers is to educate our clients about the options available to them and how these differ not just between themselves, but also crucially how they may be different to traditional, non-ESG funds. It’s only when clients understand this that we can then start to ask for their views and discuss which options may be most suitable for them.

“As a business, we expect our advisers to educate and explore client views as not only part of the initial fact-finding process but also revisit [them] during regular review meetings. Ensuring that this is an ongoing dialogue with clients will be key to building up the right level of understanding across what remains a complex area.”

But Darren Cooke, a chartered financial planner and director of Red Circle Financial Planning, says there is a problem of establishing a client’s thoughts on ESG without “prejudicing” their answers.

“Personally I have had very little demand from clients directly seeking to invest their funds in ESG and those that have are only generally concerned about the environmental aspect,” Cooke adds.

“Now you can argue that clients don't ask because they don't know they could do this and part of our role is to educate them, but even just doing that could then lead them to say that they do want ESG investments even when they actually don't really care.

“Peer pressure would lead them to say yes because they don't want to be seen as the ones who don't give a damn, even if they actually don't.”

Chloe Cheung is a features writer at FTAdviser