Nearly half of advisers are not aware of impending regulation around discussing Environmental Social and Governance (ESG) investing with clients, as research revealed a “lack of preparedness” around the issue.
Square Mile Investment Consulting and Research found that fewer than half (47%) of advisers were unaware of incoming changes to Markets in Financial Instruments Directive II (MiFID II) requiring advisers to incorporate ESG considerations within their suitability requirements.
The study, which surveyed 184 advisers across the UK, also found a similar number (46%) included ESG in their attitude to risk questionnaires and just two in five (39%) have integrated it into their centralised investment proposition (CIP).
Satis Wealth Management director and Chartered financial planner David Hearne agreed there was confusion among advisers as to the regulatory obligations around ESG.
He said that whilst he did not include ESG in his risk questionnaire, it was an important consideration in the planning piece.
“There’s a temptation to lump ESG into the subject of risk, but I think they’re different things. It needs a separate conversation about ESG and other portfolio preferences – I don’t think it belongs in an attitude to risk questionnaire, because then it just becomes one of 10 questions rather than a topic in its own right,” he said.
Hearne added that legislating around ESG was “fraught with danger” due to its subjective nature – where ESG means something different to different investors – but clear definitions around the topic were important.
Expert Wealth Management Chartered IFA Dominic Spalding does not include ESG in his risk questionnaire and lets clients guide the conversation around ESG investing.
“We’re led by the client on that, because our approach is that you should be buying the market and anything that moves away from buying the market, you’re adding to the risk,” he said.
“The way we present this to clients is we’re trying to move in the right direction but we’re not pretending for one second that this is going to meet any specific exclusion requirements they might have.
“You often get clients who say you want to avoid investing in x,y,z and our view as financial planners is that’s just impossible to do, but we’ll move somewhere it the right direction with the ESG portfolios.”
More information needed
Square Mile suggested the “lack of preparedness” suggested the investment industry and asset managers must work harder to improve ESG understanding, particularly related to the incoming regulatory changes.
While nearly two-thirds (63%) of advisers felt comfortable with the terminology associated with ESG, one in five (21%) highlighted the need for asset managers to provide more information on how they select their ESG criteria and a more consistent use of language to facilitate fairer comparison between funds and fund groups.
Square Mile commercial director Steve Kenny said the research group’s findings indicated there was “still some way to go before ESG considerations are fully integrated into their advisory processes.”
“The perspective that advisers feel that there is insufficient client demand for strategies which incorporate ESG is undoubtedly influenced by the fact that a significant number of advisers do not raise the subject with them,” he said.
The director said the traditional view that investors would have to sacrifice returns to invest ethically or environmentally was debunked, but many advisers were still not determining investing in ESG as part of their suitability requirements.
“It is also clear that the investment industry in general must do a better job in explaining their approaches to ESG and the benefits that this form of investment can bring to clients. It is beholden to all market participants to provide clearer literature, greater education, and standardised terminology to encourage and enable advisers to feel confident in discussing this important subject with their clients,” he added.
Changes to MiFID II regulation around ESG are expected in 2021.