As advisers increasingly change their business models to accommodate advice on ESG investing and Sustainable Finance, ESG Accord’s Lee Coates warns that many are finding that their existing due diligence processes need to be updated – especially for firms that already have a successful Centralised Investment Proposition (CIP).
So, what’s all the fuss when it comes to due diligence? Much of it relates to the need to examine funds from an entirely new perspective, coupled with the phenomenal rate of growth of funds in the ESG investing and Sustainable space. Recent figures show that 500+ new ESG/sustainable funds were launched over the last 12 months. Many of these ‘new’ funds are in fact examples of retrofitting by fund managers; take an existing fund, build an ESG process then re-brand the existing fund as ESG. This retrofitting changes the basis of the fund, so any existing due diligence needs to be updated to demonstrate ongoing suitability. Then, of course, there is the due diligence needed on the new funds in this space. A new set of questions will be needed to build a profile of each fund for easy and consistent comparison.
Internal ESG CIP?
I’m going to tread very carefully here, as I certainly don’t want to upset anyone! Even if you have the ‘best’ CIP, where it works brilliantly and clients love it, it doesn’t mean that you’ll be able to transfer these skills to an ESG/ Sustainable CIP. Why? Well, it’s a combination of massively increased due diligence work added to the fact that there is no point having just an ESG CIP. That’s not to say that an ESG CIP is a bad idea, it is just that it isn’t enough. We now enter the territory of ‘shoe-horning’. ESG is just one aspect of Sustainable Finance, so a single ESG CIP isn’t meeting the needs of clients who might want investment in line with the UN Sustainable Development Goals, may want ‘Impact’ included or who want an ethical option.
Looking ahead to when the new fund label regime comes in, all funds will have an ESG/Sustainable label, so advisers need to ensure that client preferences are aligned to the appropriate label, even where one of the labels is likely to class some funds as “Non-Sustainable”. The FCA’s DP21/4 suggests the use of 5 different labels. If this is the case, then firms running their own CIP will need at least one CIP for each of the labels. The Non-Sustainable Label can be linked to the firm’s existing CIP, so that leaves at least 4 new ESG/Sustainable CIPs to set up, research and update regularly. We think that there would need to be a few more Sustainable options to cover strategy areas not covered by the Fund Labels (some will naturally sit as suboptions under one or more of the labels). Alternatively, you could provide clients with an explainer of the complete Sustainable Finance spectrum, then disclose that your firm only offers advice on certain aspects of this spectrum through its CIP.
If not CIP, why MPS?
If you already have a CIP in place, keep it going for clients who don’t want an ESG/Sustainable option. For those who do want access to a full range of values-based investments, we believe the MPS is the best option for most firms. Advisers can focus their due diligence on the Discretionary Fund Managers (DFMs) offering an ESG/Sustainable MPS rather than the 1000+ ESG/Sustainable funds available. Each DFM offering has a different feel and can easily be matched (via a framework such as that from ESG Accord) to the preferences and objectives of clients.
By using an ESG/Sustainable MPS, advisers can focus on the client relationship and handling the soft information required when offering ESG/Sustainable advice. Leave the fund analysis, performance, ‘added value’ assessment of funds to the DFM.
By focusing on the MPS options, via platform, advisers can match MPS strategies to client needs. We’ve seen advisers use a different MPS for the same client on different products. A simple ESG-aligned MPS for a client’s ISA plus a longer term Sustainable and Impact focused MPS for the same client’s SIPP. Matching client preferences, objectives, values and Attitude to Risk to specific products and different MPS solutions has to be the way forward.
At the end of Q1 2022 we will be releasing our ESG and Sustainable MPS Report. We asked DFMs to complete our detailed and comprehensive Due Diligence Questionnaire, covering everything from ESG and Sustainable, to Engagement, alignment to the SDGs and ethical investment policies. The Report will be a one stop shop for advice firms to assess the disparate offerings from DFMs and match them to client needs.
About ESG Accord
ESG Accord provides a packaged compliance framework to firms so enable them to handle all ESG & Sustainability preference outcomes. This will increase your firm’s suitability outcomes, fund strategies will genuinely meet client needs and you’ll be meeting your PROD requirements as a distributor. Trust and transparency are increased, and the client is more engaged. For more information contact: firstname.lastname@example.org