Advisers and other professionals giving investment advice may end up being required to consider their clients’ environmental, social and governance preferences. European Commission is seeking to amend MiFID II and the Insurance Distribution Directive to make it mandatory for advisers to prove they consider these issues in their suitability assessment.
Advisers who had been providing advice on values-based investing as well as experts in the area welcome the move which they see as long over-due. Here are their recommendations for how to prepare for a change in the rules.
Advisers view: Lee Coates
All clients would hope that governance has always been done properly. Most fund managers nowadays will say that they take ESG into account, but I fear that this is possibly 95 per cent on the ‘G’ and the rest on the ‘ES’. If I am right, many fund groups will struggle to demonstrate just what they are doing on the E and the S.
For advisers, I am not sure too much needs to be done other than to be up to speed on the sorts of issues that the fund groups are dealing with. Whilst advisers are not going to be forced into an epiphany moment and embrace ethical and responsible investment, the forced reporting on ESG should actually allow advisers to handle any questions that relate to climate change or social issues. Something along the lines of…”the fund managers have to make allowance for this sort of thing and it is on them to make sure that you aren’t going to lose money because they are investing in old, dying industries.”
Lee Coates is Managing Director at Ethical Investors
Expert view: Julia Dreblow
“This is a welcome, if over-due development. For approaching two decades research has indicated that many more people would like to bring environmental, social or indeed ethical considerations into their investment planning than actually do so.
Although many intermediaries are already successful in this area – many, until recently, have assumed that if a client is interested in such issues they will request it. Poor financial literacy and low awareness has however in practice meant that this does not often happen.
The main challenges for making these proposals a success will be around advisers having the confidence and competence to change the way they operate – so that when a client indicate an interest the adviser can act on it. This means adapting advice processes and being able to discuss ‘ethically diverse’ fund options.
The increased interest in and urgency of climate related risk in particular mean that upskilling in this area will prove valuable as it will help advisers to forge closer relationships with their clients whilst also helping to de-risk their portfolios – and exploit growing ‘green’ opportunities.
Advisers and other intermediaries are invited to use our whole of market, free to use Fund EcoMarket tool for information on fund strategies as well as fact finding.”
Julia Dreblow is a founder at Ethical consultancy SRI Services
Adviser View: Chris Welsford
“We very much welcome the EU proposals as they recognise and support the vital role that capital markets are playing in achieving the U N Sustainable Development Goals. This is particularly important given the slow response of governments to the existential threat presented by continued fossil fuel use, the resulting environmental destruction and global warming, which the SDGs are designed to help address.
“However it is important that advisers, new to this area, understand that sustainable investing and ethical investing are not always the same thing, particularly in terms of the know your client rules. We should be asking questions about our clients’ ethical views as these help us to know our clients and enable us to factor these views into our advice.
“Otherwise we cannot demonstrate suitability. Those views will almost certainly be represented by some of the Sustainable Development Goals but as the EU proposal seems to be saying, each client will have a different personal perspective, which reflects the individual nature of ethics and, dare I say it, religion. Without this information you can’t know your client. Building sustainable investment portfolios is something different to that.
“That’s about recognising the value of ESG momentum and sustainability in delivering investment outperformance. That should be employed in our investment process regardless of clients’ ethical views. Thorough ESG analysis is also an absolutely essential part of understanding and hopefully controlling investment risk.”
Chris Welsford is a Managing Partner at Ayres Punchard Investment Management
Expert view: Gavin Francis
“This is welcome as it provides the market with a strong signal and clarity in an area which many advisers have been exploring led by investor demand. It will require advisers to develop a framework to understand interested investor objectives, communicate the aligned opportunities and report ongoing outcomes. This will require resource.
“The ability to access trusted sources listing a comprehensive range of these investments enabling advisers to compare using consistent and decision useful criteria is an essential to ensure implementation is manageable and cost effective.
“We analyse data on almost 250 UK retail funds on the impact investment spectrum, this has increased by 56 per cent over the last 5 years.”
Gavin Francis is a founder and Director at Worthstone