Guest Spot: ESG and Sustainable Finance – Part 2

  • Author : Lee Coates
  • Date : 11 Jan 2021

The second of a two-part look at the impact of proposed regulatory changes on financial advice by Lee Coates OBE, Ethical Money and ESG Consultant

The observant amongst you will have noticed that the title of my two-part piece now includes Sustainable Finance. I have added Sustainable Finance to the title because it looks like the taxonomy from the EU and the FCA is moving in that direction.  It also links in with the Government’s sustainable economy and society agenda. This is a fast-moving area, and the pace of change is increasing.

What is interesting is that ESG and Sustainable Finance are often used to describe the same thing but, in my opinion, the two are quite different in their application. ESG is more about the process, the metrics and Sustainable Finance is a direction, the outcome, a goal. For the purposes of this article, I am going to concentrate on the process and compliance – ESG.

In the earlier article, I made the comparison between your AML procedure and ESG – it is all in the process. It isn’t a question of developing a process if you encounter money laundering, you need to demonstrate you have a process in place to identify money laundering and take to action if necessary.  ESG is just the same; you need something in place before you start to ask clients the question.  Regulators are moving towards making ESG and Sustainable Finance part of the KYC process, so advisers are going to need to develop a process which meets the needs of their client base and their own business model. For ESG, advisers will need to have a 3-part process to be able to deliver advice in this area. These three parts form the core elements of your written ESG process. These parts are:

1) Fact Find – you will need to include a question on ESG or Sustainable Finance in the Fact Find process. It might just require a simple Yes/No answer from the client on the main Fact Find. If the answer is no, then that is it; your Fact Find has recorded that ESG is not for the client and your Reason Why Letter can confirm the client’s understanding and implication of their decision. If the answer is Yes, then you move to Part 2.

2) Information gathering and record keeping – I suggest that you have a separate ESG questionnaire to gather information on the client’s interests and preferences. Having it as a separate form (like a separate Attitude to Risk form) ensures the main Fact Find isn’t cluttered with extra information that may not be relevant to all clients. How the information is recorded and what use is made of the information, is dictated by your ESG Compliance process. Once a client has said Yes to ESG and you have gathered their views on environmental, social and governance issues, you can move to the final part of the process.

3) Compliance research and delivery – over time advisers will become familiar with the best managers and funds in the ESG space, but in the early days it is likely you will need to use a third-party service. Such a service will allow you to convert the information gathered from the client into a filtered list of acceptable investment opportunities. As with all good compliance procedures, it is all about recording information, documenting research, and explaining the results. The better the third-party service, the more comprehensive the results and the easier it will be for you to build this into your Suitability Letter. Some of the third party services, such as Ethical Screening ( offer a free to use online database of ESG, ethical and Responsible funds for financial advisers. It would be worth registering for this service now, to familiarise yourself with what managers are offering, and you will receive updates as new funds are developed.

Although I have outlined three separate parts above, in reality they merge into a seamless and compliant process for delivering advice to clients interested in ESG. The support services I have described as part of (3) above can help you to deliver the final part.  Based on my own research no one has thought about how advisers develop their own process, produce a workable ESG questionnaire with training support to explain and interpret the answers from client discussions and embed this into the firm’s compliance procedures – part (2). Help is, however, soon to arrive in the form of a new support service for financial advisers, Pension Scheme Trusts and Compliance Consultants – ESG Accord.

Working with a team of ESG and compliance professionals, ESG Accord has been developed to provide a support service for advisers to plug the compliance and support gap between client need and the fund research providers. We aim to deliver white label ESG questionnaires, pre-prepared ESG Compliance Manuals, Suitability Letter options and training on all aspects of ESG, responsible and sustainable money. The launch date for ESG Accord is slated for January 2021 so please look for further information via the normal Financial Services media as well as your Novia representative.

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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