Should advisers or clients lead the conversation on ESG?

In July 2020, the CII announced it is working with the International Association for Sustainable Economy to offer a qualification for financial advisers in ESG, or environmental, social and corporate governance considerations, from the fourth quarter of 2020.  

This reflects momentum within the industry towards ESG as much as, or perhaps even more than, an increase in demand from clients. While clients probably wouldn’t be familiar with the term ESG, some will have heard of ethical or sustainable investing. However, the introduction of this qualification is indicative of an increasing expectation from the regulator and professional bodies that advisers should consider ESG for all clients, not just those who express ethical preferences for where their money is invested.

On the regulatory front, from next year it is set to be a MiFID II requirement for advisers not only to ask clients about ESG but also to have processes in place for clients who express a preference for the ESG route. Implicit within this is an expectation for advisers to introduce the matter of ESG rather than waiting for clients to raise the issue. But more than this, advisers are being led to consider ESG across their client bank, essentially as part of their due diligence process. EU parliamentary regulations agreed in November 2019 and due to come into effect in March 2021 state advisers should ‘take sustainability risks into account in the selection process of the financial product presented to investors before providing advice, regardless of the sustainability preferences of the investors’. 

While the implementation date of the regulatory changes mentioned above is after Brexit, regardless of whether they are simultaneously adopted into British financial regulation the direction of travel is clear. Advisers should gen up on ESG, not just to equip themselves with answers when clients ask about ethical investing, but to protect the interests of their entire client bank.

Clients trust advisers to be ahead of the curve on investment matters. According to a study by Rathbones, there is near universal agreement amongst advisers on the importance of ESG for future performance. They found that 97% of financial advisers, including those who only infrequently advise on ESG investments, agreed or strongly agreed with the statement that “business and society are changing, so ESG factors will become increasingly important to investment performance”. Even clients who don’t care about ESG care about performance, so just from this perspective it makes sense for advisers to consider ESG on their clients’ behalf.

Coming at it from another angle, if investing in companies that don’t meet ESG criteria could have an adverse effect on performance, there is a business risk inherent in not discussing ESG with clients. In an extreme example, client portfolios could take a significant hit if the assets of oil and gas companies become stranded as the world moves towards a zero carbon future. Clients would then have serious questions to ask of their advisers on why they were exposed to assets that were potentially going to be revalued to zero, especially if they weren’t made aware of this risk. The investment and insurance industries are already well aware of the risks of continuing to fund fossil fuel companies so a client might reasonably expect their adviser to be informed, and informing them, on these matters too. 

Finally, there can be much to be gained by discussing ESG with clients. Many new clients will have existing pensions and bonds with insurance companies, and funds and ISAs direct with fund managers. These products typically have limited fund choice, and a lack of options for constructing an ESG portfolio. ESG can therefore be another way of demonstrating that your investment proposition offers diversity and future-proofing that they just can’t find with their existing providers. 

If you are an IFA and require Paraplanning assistance don’t hesitate to get in touch.