There is a view that asking clients about their attitude to environmental, social and governance issues may sway them into incorporating an ESG approach, out of peer pressure or guilt.
But in a discussion paper on sustainability disclosure requirements and investment labels, the Financial Conduct Authority said in November that it recognised the “important” role that advisers play in providing consumers with sufficient information to assess which products meet their needs, and that it aims to consult on proposed rules in the second quarter of this year.
“We are also exploring how best to introduce specific sustainability-related requirements for these firms and individuals,” the discussion paper reads. “Building on existing rules, a key aim will be to confirm that they should take sustainability matters into account in their investment advice and understand investors’ preferences on sustainability to ensure their advice is suitable.”
Jim Thompson, senior investment consultant at Defaqto, notes: "Understandably, this is an area that regulators are looking at extremely closely to ensure retail clients are treated fairly, with a raft of new rules in the pipeline for the UK market.
“Hopefully, this should mean clients receive the most suitable advice, and importantly, ensure product providers are representing their offerings in a clear and consistent way.”
But in the meantime, is the onus on advisers to proactively gauge a client’s ESG preferences, or on clients to express an interest first?
“Far too many financial advisers believe that the onus is on clients to bring up the subject of ESG and sustainability,” says Lee Coates, co-founder of compliance consultancy ESG Accord. “The assumption is that if they were interested, they would mention it.”
Will Thompson, chief sustainability officer at Pacific Asset Management, which co-developed profiling tool Enlighten ESG, agrees the onus is on the adviser to introduce the discussion of ESG with clients, but acknowledges that some clients may want to lead the discussion.
“What is needed is a repeatable way for an adviser to both ask important questions around ESG, and also to help educate clients, as their knowledge levels can range a lot,” he adds.
Attitude to sustainability
Coates also warns of poor client outcomes and an increased potential for complaints if an uncoordinated approach to ESG advice is adopted.
“There is no point asking for someone’s views on something they don’t understand,” he adds. “Advisers need to provide clients with enough information to make an informed decision.”
Andy Miller, an investment specialist at Quilter, who describes it as “very prudent” to proactively raise ESG with clients prior to any specific regulatory proposals, draws a comparison between attitudes to risk and sustainability preferences.
“Advisers are very used to having a risk discussion with clients. The way we think advisers should probably approach [ESG] is to think about it in the same sort of terms.