Investing responsibly is increasingly important to investors, and the COP26 conference will no doubt initiate a number of conversations between advisers and their clients around this topic.
But with around 4,000 funds available, and the number of environmental, social and governance-labelled funds rising, finding the correct fit for a client’s profile is a Herculean task.
Additionally, with no uniform industry-wide reporting, it is hard to compare like for like.
In an attempt to simplify this process, the Financial Conduct Authority announced this month that it will soon require intermediaries to take sustainability issues into account when advising clients.
This will include potential criteria to classify and label investment products in lieu of the EU’s sustainable finance disclosure regulation, which was not implemented in the UK due to Brexit.
The regulator warned in July that it was seeing a lot of applications for authorisation of investment funds with an ESG or sustainability focus that were not up to scratch.
“ESG and sustainable investment funds are currently the fastest growing segment of the European funds market, reflecting increasing investor appetite for these investments,” it said.
“We have seen a high volume of applications for authorisation of funds with an ESG focus... a number of these have been poorly drafted and have fallen below our expectations."
Oscar Warwick Thompson, senior policy and communications manager at the UK Sustainable Investment and Finance Association, says “getting under the hood” of ESG funds is really critical for investors and savers.
“Some funds marketed as ‘sustainable’ aren’t always as sustainable as they appear to be,” he says.
“Strong, consistent regulations on the design and disclosure of ESG funds will be very important.”
While the industry waits for more concrete regulation, there are a number of tools advisers can use to select responsible funds for their clients.
One is Dynamic Planner, a financial planning software company, which earlier this year launched an ESG questionnaire for advisers to use with clients.
Jim Henning, head of investment services at Dynamic Planner, says the aim was to address all the reasons why advisers might not want to have a conversation around sustainability with their clients.
“[There are] reasons not to do it. But we’ve got to break through all that,” he says.
“We wanted to try to give [advisers] the chance to get comfortable with a new type of process.”
Henning adds that the high level of detail in funds’ sustainability credentials is easy to get lost in, and that does not engage clients very well.
So the company has created a questionnaire it hopes can be integrated into the processes advisers are already using to risk-profile their clients.