Is ESG and Sustainable Finance valued by advisers and clients? Lee Coates OBE on #WorldEarthDay

This article, from ESG Accord’s renowned expert Lee Coates OBE, features as part of IFA Magazine’s celebration of World Earth Day

My clients aren’t interested in ESG and Sustainable Finance!

This is still a very common pronouncement from financial advisers. This may well be true but dig a little deeper and things start to unravel. If, on making the pronouncement, the adviser is asked “How do you know?” the most common response is “because if they were interested, they’d ask for it”. Let’s unpack this a bit.

So, someone has come to an adviser for financial advice, rather than doing it themself. This implies they have identified they need help, perhaps in a Rumsfeldian “they don’t know what they don’t know” way. If they don’t know enough to go it alone, is it reasonable to assume that they know everything they need to know about ESG and Sustainable Finance? I’d argue that they probably know little or nothing about these areas, like so many others, which is why they are looking for, and willing to pay for, financial advice.

If we assume the ‘if they want it they’d ask’ approach to advice is correct, then logically it would apply to other areas of financial advice. That’s not an unreasonable assumption, is it? If we apply this principle to the issue of Attitude to Risk and Capacity for Loss, things get a little interesting. Hand on heart, how many advisers have had clients, completely unprompted, start discussing AtR and CfL in detail, or bring their own pre-completed psychometric AtR tests with them? I expect the answer is pretty close to Zero (pretty close, as there will always be someone who has a client that has done this!).

That being the case, doesn’t this imply that AtR and CfL are something clients are not interested in and surely it would save a great deal of time if advisers didn’t bother asking any questions in this area? It would make the advice process easier, clients wouldn’t get confused by acronyms and complicated ‘investment stuff’. Job done – well perhaps not. No firm is going to refuse to cover AtR and CfL, even if their clients don’t express any deep interest in these areas.

So far, I haven’t even mentioned the fact that PROD and COBS rules require advisers to cover ESG and Sustainability preferences as part of the know your client and matching financial objectives requirements. So those firms not asking ESG and Sustainability questions are already in breach of two sets of rules. But wait, there’s more.

In 2023 we see the Consumer Duty rules come in and these have a specific requirement for advisers to inform and educate clients to allow them to make meaningful decisions and to understand what is being offered. It has already been confirmed that this covers ESG and Sustainability. Oh, there’s even more – let’s not forget the Sustainable Fund Label Regime!

In late summer 2022 the FCA plan to release their Consultation Paper on the Treasury’s proposed Fund Label Regime. We at ESG Accord are proud to have been asked to sit on the DLAG (Disclosures and Labels Advisory Group), which is helping shape the FCA’s work in the space and to inform the Consultation paper. When the Sustainable Fund Label regime comes in, it will be impossible for advisers to ignore ESG and Sustainability. Even for those clients that advisers ‘know’ don’t want ESG and Sustainable Investment, it won’t be possible to not talk about it. That is because all of the funds that these ‘I don’t want ESG’ clients are likely to be advised to invest in will have a Sustainable Label, and the current working title for the label (see DP21/4) is “Promoted as Non-Sustainable”.

Handing over a KID with a big “Not Sustainable” label on it is going to trigger some interesting conversations. If I am wrong and the “they don’t want it” advisers are right, then all will be well in the world. The advisers will show the Label and their clients will turn up their noses. If, however, I am right and the ‘they don’t want it’ advisers are wrong, then it will be time for all fans to be removed from advisers’ offices to make sure that lots of stuff does hit them! Advisers might also need a large shovel to dig themselves out of the whole they are in when it comes to explaining to clients that it was their fault they didn’t get ESG/Sustainable because they didn’t ask for it.

Taking into account the existing rules and the new rules coming in soon, now is the time for advisers to bring ESG and Sustainability questions into the advice process for all existing and well as new clients. The longer it is left, the harder it is going to be to deal with the “why didn’t you mention it before?” question.

Building a best practice compliance process is the best way to introduce ESG and Sustainability to clients, undertake sound due diligence, match clients’ needs to fund strategies, avoid future potential complaints and manage change to a low carbon economy.

Lee Coates OBE is Co-Director of ESG Accord.

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