With the clock ticking on new regulations that will require advisers to evidence that they have taken clients’ ESG preferences into account when making investment decisions, now is the time to prepare your business to ensure compliance.
While the finer details of the regulations are still to be confirmed, the high-level guidance is clear and the working assumption is that they will come into force in the first half of 2021 so there is no harm in getting prepared now.
Fully understanding the topic and helping your clients to work through their feelings about how their investments should reflect their own beliefs will be a rewarding exercise. To help with the process, we’ve recently published a free to download whitepaper, ESG in Investing: everything you wanted to know but were afraid to ask. It provides a one-stop-shop to equip advisers with the essential information required on this complex subject.
Five things to do now
Read up on Responsible Investing
ESG is growing in importance and it will be the advisers who are most familiar with it who will be able to seize the opportunities of increasing client demand as well as navigate the risks of future regulatory compliance.
Create a ‘Responsible Investing’ Policy
Use this as an opportunity to disclose how you take ESG considerations into account in your advice process and also to highlight to clients your values as well as the value you create as an adviser. Put this policy on your website.
Add ESG Questions to your Risk Questionnaire/Client Fact Find
Not only will this help meet the upcoming requirement to include ESG in your suitability process, it should spur valuable conversations with your clients. Take care when designing the questions though: they should be free of jargon and should not oversimplify complicated issues.
Know your Product/Service Providers
Ask to see the Responsible Investment/ESG policies of any providers you currently use or are thinking of using so you can make sure their beliefs are consistent with your own, and that they are adequately considering sustainability risks.
Document your Findings
Add an ESG section to your client files, if one doesn’t already exist. If your client has strong feelings on exclusions, exactly what these are should be documented. If the client doesn’t have a strong preference for any elements, this should also be documented.
Be aware that it’s likely that many clients will not be able to identify where they fit into industry bodies’ frameworks, or how strongly they feel about a particular exclusion because they may not have the necessary context.
It will be up to you, the adviser to elicit this information, through a well-designed questionnaire, and through discussion of what the client wants to achieve and what trade-offs might be involved, such as potentially higher charges or a potentially different risk/return profile.
We’ll be looking at how this can be tackled in a future blog…watch this space.