The Roadmap to ESG - Part 7

In the seventh article in our ESG series, compiled with help from research firm NextWealth, we look at what we know about the FCA’s stance and how this will impact financial advice professionals.

An updated version of the FCA’s ‘A strategy for positive change: our ESG priorities’ was published in November 2021, ahead of the United Nations Climate Change Conference (COP26).

Fund groups and asset managers in the UK are currently preparing for the introduction of the Sustainability Disclosure Requirement (SDR) rules, seen as the UK’s response to similar EU regulation. The creation of an investment labelling system is a positive move towards addressing advisers’ frustrations with a lack of consistency and clear standards.

“I think from the FCA paper certainly there will be a lot of feedback on the taxonomy of the position. I think, if that can get sorted, that's a first step towards it because I think that's causing a lot of confusion. Just labelling stuff as ESG is pretty unhelpful if I'm honest.”

Alex Reynolds, Advies Private Clients

It is hoped that the final universal labelling and disclosure requirements for UK-domiciled funds will support clearer and more consistent client conversations.

While it doesn’t list rules for financial advisers, the FCA’s paper does give strong indications as to the direction of travel. It expects advisers to “understand investors’ preferences on sustainability to ensure their advice is suitable.”

“We see it as a reporting requirement coming up. I think there's no doubt there will be a thematic review from the FCA’s point of view on ESG investing at some point. And certainly, we'll be doing questionnaires on all the things that we do. So we will be absolutely reporting on that.”

Adrian Murphy, Murphy Wealth

The advisers we spoke to for this series also expect more guidance on reporting and monitoring of how client preferences on sustainability are established and recorded. As we discussed in step five, firms can prepare by taking steps to document the client conversation or established hierarchy of preferences with regard to sustainability and other investment objectives.

“What we have in place are robust processes that prompt us to have the conversation, provide the client with a document that’s a barometer of where they fit on that low to high desire for responsible investing. From a governance and regulatory point of view, we have systems and controls in place that look at what an adviser is recommending, but what's more important is actually we're getting the client involved in this journey, the client’s responses drive more of the conversation so that you take out the personal preference of the planner”.

Stuart Harding, Attivo Group

Beyond climate change

Something that stood out from our research with financial advice professionals was the strong focus for ESG to be about ‘green’ issues, fuelled by climate change and the need to have a more sustainable world.

While this is an important issue, ESG is more than this and the social aspect (the ‘S’ in ESG) is something the FCA says it is keen to see addressed by the entire financial services industry.

The FCA paper states that they are “committed to building resources and capabilities on ESG beyond climate change, and ensuring that our regulation takes a broader ESG perspective”. They list diversity, culture and purpose, as well as governance as areas they will leverage, which means any organisation within the financial advice chain will need to look to their own working practices, as well as being mindful of the practices of the organisations they work with or invest in.

Time to act

It’s clear from the research we’ve carried out for these articles and the broader research carried out by NextWealth with financial planners that the advice profession is moving towards embracing ESG with increasing urgency.

What is also clear is that this new focus brings with it many challenges and no firm we have spoken with feels they are anywhere near completing their ESG journey.

Follow us on LinkedIn for our final article where we summarise what we’ve discovered and highlight some of the key learnings, hopefully providing food for thought for any advice firm that is actively looking to make ESG an integral part of their offering.

Roadmap to ESG part 8: The key takeaways

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