Guest Spot: Incorporating Client Attitude to ESG

  • Author : Guest Spot
  • Date : 7 Dec 2020

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

As Mr Dylan would have it, the times they are a-changin, and this is particularly true for financial advice over the next year. There has been much commentary about ESG (Environment, Social and Governance) over the last few years, but to date it has all been about what investment managers are doing. Proposed Regulatory changes will mean change for the adviser community as well.

ESG offerings have grown dramatically over the last two years, mostly because fund managers are now required to state their ESG position (that’s Regulation as a catalyst for positive change). There is no doubt that the majority of fund managers will claim there are investment benefits from following ESG, but there will be many different ways of applying an ESG process. Fund managers should have been applying sound Governance policies for some years (let’s hope it hasn’t only just occurred to them when picking stocks), so that leaves managers with a free reign on how they might incorporate environmental and social issues into their investment process. Best case scenario is a fully integrated process across all investment decisions, taking into account a company’s social and environmental impact. Worst case scenario…”Yeah, we do ESG as well”.

The proposed changes for advisers are a result of a ‘tweak’ to the MIFID II rules. In a nutshell, the advice process will need to incorporate an assessment of each client’s attitude to ESG. Advisers will need to record whether a client wants to apply ESG factors as part of their advice process. This in itself is interesting, but hardly a process change. However, there is a second part to the ESG question; advisers need to demonstrate that they have a process in place to deal with a ‘Yes’ answer from a client. This process needs to be incorporated into the current MIFID II processes for selecting products and funds. It isn’t good enough to say “I’ll deal with it if I get a Yes”, as a formal process needs to be in place.

This is more about Compliance functions than ESG – just see it as a new section in your Compliance Manual.  With no right or wrong way of managing or advising on ESG, the regulatory focus will be on due process in the event of a client expressing an interest.  The process you adopt is one that fits in with your firm and meets the needs of your particular client base.  There is no doubt that investor interest in ESG will increase, but how engaged clients are will depend on each client. Most, after expressing an interest, will leave it to you, their IFA, to build into your advice.  This does give you a broad degree of flexibility, but it also attaches a high degree of responsibility to get your product and fund recommendations right.

There is no doubt that ESG will impact on day to day advice processes, but the impact does not have to be significant. Many advisers are going to see article after article telling them that they will need make wholesale changes to their business, that ESG will be a cornerstone of what they do and that they will have to become overnight experts. Reality check: most of those telling you that you have to fundamentally change the way you do things have a fund or product to sell. Most of these people have also never been an adviser and don’t understand what advisers do. Personally, I think the changes to the advice process are a good thing because it gets environmental and social issues out into the open when discussing investment options with clients. The changes are, however, very manageable and can significantly enhance the client-adviser relationship. Clients can feel that they are making money (look at the strong performance of ESG mandates) as well as being part of making a positive difference.

So instead of seeing ESG as the Fifth Horseperson of the Apocalypse, look at it as a new process to run alongside your GDPR and AML procedures. Unlike GDPR and AML however, ESG can have a very positive client impact. The benefit ESG offers is that for those clients who aren’t interested, there is no impact on the advice process. For those clients who see ESG as important, talking about it and bringing it into the advice process will be seen as positive. Rare for IFAs, but that looks like a win-win to me!

In Part 2 of this article, I will look at ways in which IFAs can build a compliance friendly ESG process and how to offer advice in this growing area.

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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