Environmental Social Governance – ESG are you preparing?

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16 March 2020 

A few blogs ago we re-introduced PROD back into your considerations,  and within this ESG was mentioned : –

“With further requirements this year requiring firms to consider ESG, Environmental, Social and Governance preferences, it would be a good opportunity to amalgamate the two into your review and integrate this into your investment process.  We will be blogging on ESG requirements very soon and it’s definitely one to look out for, another one with the potential to slip under the radar”

We are sure that most of the CPD events you are attending ESG will be presented at some level so you will be aware that this is a hot topic.

When did we become more socially aware?

As the world changes at an extraordinary pace driven by concerns about global warming, plastics, irresponsible companies, social and responsible awareness hits unprecedented levels both in the boardroom and also at an individual level.  Generation X (especially), millennials, very young and old alike are listening to warnings from David Attenborough to Greta Thunberg, young children are seriously anxious about what their world will look like when they are older, and people want action.  Most people are wanting to be a responsible citizen and do their bit to help, and people are much more aware and conscious about where they are investing and into what.  We would imagine your conversations with clients in this area have shifted slightly, but like everyone else, we see the impetus of this increasing rapidly.

During the 1970s and 80’s responsible investment, or ethical investment as we knew it then, really started to increase with more information being accessible.  Who can forget being asked to support Anti-Apartheid movement by boycotting South Africa’s exports, especially their apples, in 1989?  It doesn’t seem that long ago that Friends Provident released the first Ethical retail fund, the Friends Provident Stewardship life fund.  Things started to change.

But what does it all mean for you as advisory firms and what and when are you required to be doing something?

In 2018 a raft of legislative proposals to help embed ESG issues into governance standards across the finance sector was unveiled in the European Commission’s Action Plan on Sustainable Finance.  With the UK leaving the EU in 2020 it is widely anticipated that this legislation will still apply as the FCA wishes to maintain regulatory equality for a period of time.  It is therefore expected that some form of requirement for advisers will come in in early 2021, which is expected to be as follows: –

  • ESG needs to be discussed and noted in the fact find process, firms will be expected to show how a client’s preferences were considered. This shouldn’t be a tick box approach.
  • Where a potential recommendation is made to a client, the firm needs to disclose (where appropriate) ESG characteristics of each financial product before finalising the recommendations.
  • Where firms provide portfolio management services, they will be required to show and explain how the ESG preferences were accounted for in the selected holdings.

There does need to be an amendment to the suitability regulations contained in MiFID II, Article25, but it is widely predicted that this will go ahead.

We would encourage you to start looking at the expected additional requirements and start to factor these into your advice process as soon as possible, this may lead to additional training needs for advisers and paraplanners.  Most firms are looking again at PROD, we would recommend if possible, do this together to avoid doing it twice as it is related.

As usual, where you have concerns, or you wish to discuss this please get in touch with our consultants.

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