Not only will the UK be blazing a trail globally, but we will be creating the framework to place the climate at the heart of a wide range of decisions, starting with those that could have some of the greatest impact, namely, what we do with our personal investments.
But Sunak’s speech also emphasised to the UK’s financial services sector the huge responsibility that will be placed on its shoulders to drive the delivery of the UK’s net zero ambitions.
The net zero transition is no longer being framed as a burden on financial services companies, but rather a chance to create commercial opportunitiesThis ranges from the UK’s large businesses, which will be required to publish detailed plans on how they aim to transition to net zero, to standalone financial advisers or wealth managers, who will be required to consider clients’ ESG values in the recommendations they give.
Fortunately, developments at Cop26, including announcements made by the Financial Conduct Authority, have also made clear that the financial services sector would not be required to do this alone.
The net zero transition is no longer being framed as a burden on financial services companies, but rather a chance to create commercial opportunities by helping meet changing consumer and institutional demands, and by distinguishing the UK from competitors around the world.
Advisers should note a recent discussion paper published by the FCA seeking views on two initiatives that it will be responsible for implementing in the coming months and years; the first on sustainability disclosure requirements (SDR), and the second on consumer-facing labelling for investment products. These are likely to form the foundations of future regulation applicable to advisers.
The SDR aims to bring together a number of existing sustainability-related disclosure requirements into a new, single framework, considering expansion of the Task Force on Climate-Related Financial Disclosures' recommendations and reporting against new UK green taxonomy.
It will also integrate the global standards now being developed by the International Sustainability Standards Board, making the UK one of the first countries to apply these standards when they are published next year.
Under the FCA plans, investment products will also need to show the impact, risks and opportunities of the activities they finance using a new consumer-facing sustainability label.
As with the EU’s Sustainable Finance Disclosure Regulation, the bulk of which came into force earlier this year, SDR is designed to avoid greenwashing and instead give investors confidence that their money is being directed towards investments that genuinely support the transition to net zero.
Similar to the SFDR classification of investments into three categories, the FCA plans to create five categories for investments, with labels making it easier for clients to select investments that match their values on sustainability.
The advice landscape
What does all of this mean for financial advisers and wealth managers?
Firstly, this announcement shows that the FCA recognises how crucial their own role will be.
Secondly, it shows that the FCA recognises the role of advisers in ensuring the right customer outcome can be achieved.
Advisers will be required to “take sustainability matters into account in their investment advice,” meaning that they will have to ask clients additional questions about their ESG values just as they already discuss needs and objectives, risk appetite and a host of other key factors.
The FCA is still looking into exactly how it will require businesses and individuals to do this, but it has suggested that it will follow a principle-based approach, which is arguably more flexible and less prescriptive than setting a long list of detailed rules.
Although there will also likely still be a fair amount of prescription in the requirements – for example across risk appetite – UK regulation is likely to be outcomes-focused given the FCA’s broader direction of travel (including consumer duty). There is a fine balance to be struck between flexibility and prescription while driving tangible change, which the FCA is well aware of.
Optimistically, the growing consumer demand for better quality and more consistent information about investment products and the growing trend towards sustainable, values-based finance indicates that a less prescriptive, more outcomes-focused approach may be successful.
While there is no guarantee that the UK will not diverge from EU, and indeed US, regulations in the future, and while the FCA cannot remove the obligation to comply with other regulations where necessary, the fact that it is building on an existing baseline should make it easier for financial advisers and wealth managers with clients in the EU, or for businesses that operate in parts of the EU.
Giving products mandatory investment labels will give advisers and consumers the ability to assess all products in a comparative way and give them the assurance that, when a label suggests a product has sustainable objectives at its heart, those claims can be substantiated.
There could even be an indirect advantage if better labelling attracts more investors from outside the UK, helping create better products that will also benefit UK clients. However, it must be remembered that a greater number of labels (from three to five) can add accuracy – if clearly defined – but complexity as well.
Most of all, advisers should remember that these announcements are still part of a discussion paper. This is not official policy yet and the FCA is keen to hear views from the industry.
There is, however, an urgency to ensure that these announcements are followed by firmer, more detailed requirements as quickly as possible. We have been warned for years that the financial advice and wealth management sector will play a key role in the UK meeting its net zero ambitions, and this is just the start.
While the UK’s target to reach net zero might not be until 2050, whether we reach it depends in a large part on what we can achieve by 2030. If we allow these requirements to be a further two years in development, we lose almost a quarter of what time we have left to make an impact.
The commercial opportunities these announcements are set to create are exciting, and far outweigh any burden created by additional regulation. But if we are to seize those opportunities, we must not allow our progress to be driven by excitement alone.
Elise Bailey is senior manager in KPMG’s financial sector ESG advisory practice
