ESG Investing  

How are regulators ensuring ESG investing is considered?

This article is part of
Guide to ESG and regulation

To help with this, in November last year the FCA released a discussion paper on sustainability disclosure requirements and investment labels, to help create clarity in this area. 

The discussion paper is aimed initially at product manufacturers – that is, fund managers – as opposed to financial advisers, but the FCA does state: "This paper focuses on the elements of SDR relevant to firms involved in investment management and decision-making processes.

"However, we recognise the important role that financial advisers play in providing consumers with sufficient information to assess which products meet their needs.

"We are also exploring how to introduce rules for financial advisers, given the role they play in the investment chain. Building on existing rules, we consider it would be appropriate to confirm that advisers should consider sustainability matters in their investment advice and ensure their advice is suitable and reflects consumer sustainability-related needs and preferences."

The discussion paper will be followed up by a consultation paper, expected before the end of June.

The current thinking is to have three broad headings for all funds:

  • Not promoted as sustainable.
  • Responsible.
  • Sustainable.

It will be a while before these proposals come into force, but it does show the direction of travel. 

Not 'if', but 'how'

So, the question has gone beyond whether advisers should be discussing ESG matters, it is becoming just as important to focus on how they discuss the area with clients, and how they record that conversation. 

Medlock says: "A key aim for the regulator is to ensure that advisers take sustainability matters into account within their advice processes and understand investors’ preferences on sustainability to ensure their advice is suitable.

“This mirrors the EU’s approach in this area. It also intensifies the need for the advice community to start thinking about how sustainability considerations can be embedded within existing advice processes if they aren’t already, as well as formally asking and engaging with clients on sustainability themes and recording the responses within suitability reports.”

A survey in April conducted by NextWealth and sponsored by Parmenion found that 77 per cent of advisers thought that they were required to take into consideration client views on climate change, sustainability and ethical investments when making product recommendations.  

When it comes to whether advisers should be taking a client’s sustainability preferences into account as part of their suitability requirements, this is something the FCA expects.

At an event back in January, FCA technical specialist of sustainable finance and stewardship, Mark Manning, said: “ESG is already in scope when advisers give investment advice. Under existing rules, firms have to act in a client’s best interest and collect all necessary information to understand the client’s investment objectives.