Ensuring suitability for clients’ investments means that advisers need to take more care than ever to ensure they are capturing all the right information upon which to base their recommendations. In his latest article for IFA Magazine, ESG Accord’s Lee Coates OBE explains why – and how – the devil can be in the detail when it comes to ESG questionnaires.
Ok, when I say you shouldn’t use ESG questionnaires with your clients, that’s quite a bold opening statement. I should start by saying that I do not mean that you don’t need to use any questionnaire when discussing ESG and Sustainability with clients. That would be as daft as not having a proper method of recording a client’s Attitude to Risk and Capacity for Loss.
What I want to get across is the importance of advisers using the right type of questionnaire with their clients.
Before I outline what constitutes the ‘right’ questionnaire, let’s look at why you should be asking your clients values based questions in the first place.
Values-based financial planning
Advisers have a requirement to ‘know your client’. The FCA has repeatedly confirmed, especially over the last 6 months, that existing rules (PROD and COBS) require advisers to gather information from clients on their investment objectives. These objectives can be both financial and incorporate personal values.
If advisers are not gathering personal values-related information from clients, there is a risk the suitability of advice provided will be ‘uncertain’ at best. If there is a future complaint, you could face claims along the lines of: “if I was offered an ESG/Sustainable option, I would have taken it”. Whether that is true is irrelevant; unless your file can show that you had a discussion, gathered information and referenced in the suitability letter, it will be impossible to defend such a claim.
It is now accepted that firms who strive to be ‘best practice financial advisers/planners’ have a detailed process for asking values-based questions, incorporating this into their due diligence process and in the advice that’s offered. Where clients have no interest in ESG/ Sustainable options, a good process needs to record this. Firms geared more towards selling financial products are less likely to have any form of ESG/Sustainable Finance process.
Get clear on your definitions
But let’s go back to ESG questionnaires. Put simply, unless you have an agreed definition of ESG within your firm and have communicated this to clients, the term ESG isn’t broad enough to cover the full spectrum of areas needed to cover all client values. From one point of view (it’s a Regulatory point of view so quite an important one), it could be argued that asking ESG questions is effectively shoehorning clients into a specific and limited area. Only offering ESG would bring into question a firm’s independence. It’s a bit like having an Attitude to Risk questionnaire with a scale of 1-5, but only offering clients the opportunity to choose Risk Level 3!
Offering a questionnaire focused on ESG, and which doesn’t cover Responsible, Ethical, Impact, Transition, UN’s Sustainable Development Goals (SDGs) etc. is building up future compliance problems. I appreciate that ESG is just a name, and can mean anything, but the danger rests in the assumed meaning of ESG. For Fund Managers, most would use ESG to describe an underlying risk or data management process, rather than a specific investment strategy.
Ethical, Responsible, Sustainable, etc are investment strategies that can be linked to client values. Many clients will, of course, want to see ESG built in, but it is more about a process than a specific investment strategy. This needs to be clear to the client from outset; if you plan to stick with ESG, I suggest you provide a document explaining how your firm arrived at its definition of ESG and what it covers. It will then be harder for the client to come back 3 years later and say “I thought they meant X or Y for ESG”.
Finding a process that works for you
What wording should you use in your questionnaire? You could use the word Sustainable, as this links to the forthcoming Investment Fund Sustainable Label regime.
However, Sustainable does tend to lean towards climate change etc, rather than social or ethical issues that might also be of interest to some clients. At ESG Accord, we offer advisers Values Questionnaires. It doesn’t fix attention on a specific area, nor does it imply that values have to be applied. Our Values Questionnaire process includes the option for clients to state they do not want to build values into the advice process. This is good for compliance, is great to have on file and can be referenced in the suitability letter.
One difficulty with questionnaires is the potential of overload for many clients. Someone wanting to apply specific ethical values won’t mind completing a detailed ethical questionnaire. Another person seeking basic ESG will not want to bother with lengthy questions. That’s why, at ESG Accord, we provide advisers with a simple Triage process; educate clients first about the different options (we provide client-friendly material) then ask clients which area they are interested in. Triage ensures clients are only presented with a questionnaire that matches their preferences. Preferences can range from no interest at all right through to full ethical. For the former, there is no need for any detailed questionnaire but, for the latter, our adviser clients can provide their clients with a dedicated ethical questionnaire which is appropriate to their vales.
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About ESG Accord
Lee Coates OBE is co-Director of ESG Accord and was an ethical investment specialist IFA for 31 years.
