Shayne Halfpenny-Ray previews new guidance from the PFS for advisers looking to help clients that want to invest sustainably
Environmental, social and governance (ESG) issues might not be a new phenomenon, but they have seen a recent acceleration in our collective business and social consciousness. Addressing the ‘G’ has been a fundamental part of corporate social responsibility for decades and in more recent years the ‘S’ has been of greater importance too. So that just leaves the ‘E’. While environmental priorities stretch back beyond even the 1997 Kyoto treaty on ozone depletion, the global momentum around climate change mitigation, adaptation and the green future has grown exponentially.
We are seeing a rapidly changing environmental landscape, with decisions being made on targets, disclosures and how to get to net zero; and even tougher action taken on supporting new technologies and urgent mitigation measures yet to be implemented. In the year of the 26th UN Climate Change Conference of the Parties (COP26), the stakes could not be higher.
It is not just climate change we must consider: human rights abuse, criminal activity and poor governance are all important factors right through the value chain of an investment. As ever, we should not focus on one area at the expense of another, as recently seen in a Guardian report on the use of forced labour in the international supply chain for UK solar power projects.
This activity also reaches into the regulatory space, with the EU constructing its own Sustainability Taxonomy – a classification system for approved sustainable economic activities – and the UK pushing for greater international alignment with the recommendations of the Task Force on Climate-Related Financial Disclosures, measures that will come into UK law by 2023.
ESG is not new to the regulatory landscape, as it already exists in measures under the Markets in Financial Instruments Directive II (MiFID II) – regardless of whether the Financial Conduct Authority decides to enhance these any further. Yet, it is now seen as an integral part of the financial advice process, so we need to ensure advisers have the tools and the support to traverse the sometimes-murky terrain. Not just for the sake of compliance, but to guarantee the profession is engaging with the growing consumer desire for sustainable investments.
The new PFS practical guidance for sustainable investment, developed in partnership with Schroders, focuses on core questions advisers should be able to answer. It includes sections covering: what sustainable investments are and what sits behind them; why they have become so important; how sustainable investing affects advisers; what questions advisers should ask about sustainable investments; what the considerations are to make in fund searches; and how to help clients make the right choices and answer their questions. It also includes some jargon-busting key terms for the uninitiated.
The key point to be made is that both the profitability of ESG and its attractiveness to investors are increasing, while individual consumers and businesses alike have a growing desire to invest sustainably. The traditional mindset was either to value profitability or social impact, and never the twain shall meet. However, this is no longer the reality and the PFS guidance aims to present the various factors advisers can consider against a client’s needs and how to create a tailored investment approach that suits them. This includes actions that are determined by how much value is placed on ESG by a client – so for instance those with a strong desire for divestment would focus on a specific investment portfolio – all of which can be captured during the planning process.
The PFS guidance aims to present the various factors advisers can consider against a client’s needs and how to create a tailored investment approach that suits them
Perhaps the more complicated part of the process is finding the right fund that suits your client’s needs and not because of a lack of choice; rather there is a need to interrogate what sits within the umbrella of sustainable investments. While dependent on the categories determined by customer need, this can include questioning whether a fund manager can evidence how it considers ESG factors throughout the investment process, or whether a fund has a particular environmental or social theme matching to specific client criteria. None of this is new across investment management, but builds on existing knowledge to better support the areas of investment that advisers or their clients have not traditionally invested in. This includes mythbusting client concerns, such as whether sustainable investing is more expensive (this was certainly the case in the past, but costs have fallen as ESG has become more mainstream) and/or whether an adviser should avoid ‘sin stocks’ or fossil fuels and, if so, how to go about doing so.
Ultimately, advisers will continue to play a crucial role in advising clients on how to make their money work for them and how to do this sustainably. This relationship will be key to directing the capital investment we need to achieve net-zero targets and better social conditions. All of which reinforces the value of professional financial advice – and our hope is that this guide will support those conversations and perhaps encourage advisers to explore newer, more sustainable funds.
Shayne Halfpenny-Ray is public affairs manager of the CII