ESG: A closer look at the coming changes for Advisers

  • Author : Lee Coates
  • Date : 26 Jan 2021

Previous articles in this series (Part 1 and Part 2) have looked at the proposed new rules and some broad changes that advisers will need to look at, so in this article Lee delves a little deeper.

For Adviser use only

I need to kick off by confirming some of the assumptions that support this article.  When I refer to new rules, these rules do not actually exist yet.

Unless the FCA chooses to diverge completely from Europe’s Sustainable Finance path, we would expect to see Consultation papers emerge during 2021.  The UK Government, especially Rishi Sunak, have also pledged to push their agenda for a new green economy, with high ambitions ahead of COP26 in Glasgow this year.  The Taskforce on Climate Related Financial Disclosures (TCFD) is already working on proposals for greater disclosure in financial services so I am confident that the rules will arrive in the UK, some time in Q2 2022 and they will probably look similar to the European rules.  OK? Let’s begin.

The first step for all firms is to decide whether the firm will offer advice on ESG, Responsible, Sustainable, Impact etc.  If you decide it is not for your firm or your clients, that is fine.  However, you will need to put a statement to this effect on your web site and probably in your Terms of Business too.  That will reduce the chances of a client coming back in the future and complaining that they were not offered the chance to invest in these areas.  You will not be able to ignore ESG etc as part of your proposition without making this very clear.

Assuming you do want to offer advice in this area (many believe this will be the mainstream in 5-10 years) there is a logical process for you to go through.  Our focus at ESG Accord is on helping advisers develop their compliance process. We have developed a range of plug-in, adaptable, white-labelled process documents for you, because without these it will be difficult to offer advice on ESG etc and be compliant.

Offering advice on ESG/Sustainable Finance is not only about picking a product or fund, it is about understanding your client’s needs. You will need to avoid making assumptions about what you think they want and ensure that your process is robust enough to capture exactly what a client means if they say “Yes, I’d like to invest sustainably”.

There is no simple link between a client’s Yes and the adviser recommending a fund.  Drilling down into what the Yes means and what areas it covers is critical to the product and fund selection process.  You will, of course, be going through the normal fact-finding process and will assess the client’s attitude to risk.  A Yes answer to ESG/Sustainable creates a plug-in step between the normal fact-finding process and the product/fund research and selection.  See it as a pre-advice filter; you’ve gathered the financial facts, established financial needs, understand the client’s attitude to risk and this is where the ESG/Sustainable filter is applied to enable you to get to the product and fund(s) recommendation.

How the filter works is all down to the compliance process you put in place.  First, you will need to ensure that you have the right documentation to capture the detail needed to understand what the client’s Yes answer means. Secondly, you will need to build the appropriate research process to provide the link between the type of responsible investment the client wants and the products and funds available.

Those firms operating an internal CIP will need to develop a new process for building ESG/Sustainable portfolios.  It is unlikely that a single ESG/Sustainable risk-rated option would suffice, as you will need to meet the needs of clients looking for simple ESG, through positive Sustainable or Impact Investment as well as those wanting to apply strict ethical values.  Having a robust filtering process in place will assist greatly in developing these new portfolios so it isn’t as daunting as it sounds.  Getting the right compliance process in place at the beginning will avoid potential problems in the future from misaligned client values.

Firms that outsource investment decisions by taking advantage of a Model Portfolio Service will find that there are a rapidly increasing number of options available in the ESG/Sustainable space.  Novia’s own Copia Capital has offered an ESG MPS for some time, including income portfolios.  The number of options is going to continue to increase as we get closer to the implementation of the new rules.

ESG Accord can assist all financial advice firms, large or small, to develop the compliance processes, documentation and culture needed to operate in this space and to help firms adapt to the new rules.  We can advise on the best research providers to meet your firm’s needs and can offer training to internal compliance managers and advisers.


Lee Coates OBE
Ethical Money and Compliance Consultant
ESG Accord

The statements and opinions expressed in the Guest Spot are those of the author and do not necessarily reflect those of Novia Financial plc or any of its employees. The company does not take any responsibility for the views of the author. Any links, web pages and documentation within the Guest Spot are provided by pages maintained by independent third parties and Novia accepts no responsibility for the availability, content or use of the information contained within them.

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