Posted on: November 10th, 2021
Although I have been appointed onto DLAG the future remains unwritten of course – but I did pull together a few thoughts for FT Adviser recently which I hope you may find useful.
The text is below:
I am writing this piece from the relative comfort of an Avanti train heading home from Glasgow having have recharged my batteries somewhat by listening to some great presentations at COP26.
Although I could have seen more of the major announcements had I watched it online, the experience of ‘being there’ was quite something.
I particularly enjoyed getting the sense that there are so many of us working on different aspects of the sustainability puzzle.
An event organised by Make My Money Matter (a campaign group set up by film director Richard Curtis), co-hosted by Aviva, Triodos and WWF, reminded me of the low awareness most people have about financial matters. And a Lombard Odier event illustrated how far advanced some institutions are. Their session on Scaling Nature Based Solutions – made all the more interesting by HRH Prince Charles popping in as part of his ‘Terra Carta’ initiative – was a million miles away from the literature intermediaries generally receive.
Put together however they highlight the challenges the FCA faces regulating sustainable investment.
The FCA (alongside the PRA, DWP and others) is now tasked with helping to address climate change.
The government’s announcement (at COP) that they intend the UK to be ‘the world’s first Net Zero financial centre’ will undoubtedly add pressure – and hopefully accelerate momentum.
So how relevant is this to advisers? In brief – very.
Although the (EU’s) SFDR did not come into force here, the UK’s direction of travel is starting to emerge. The Treasury policy paper ‘Greening Finance: a Roadmap to Sustainable Investing’, published on 18 October, mentions advisers briefly – saying: ‘Subject to consultation, potential requirements including on how sustainability matters are taken into account in investment advice’, (p23).
This week’s FCA consultation CP21/4, ‘Sustainability Disclosure Requirements (SDR) and Investment Labels’ goes further.
Section 1.11 states: “This paper focuses on the elements of SDR relevant to firms involved in investment management and decision-making processes. However, we recognise the important role that financial advisers play in providing consumers with sufficient information to assess which products meet their needs. We are also exploring how best to introduce specific sustainability-related requirements for these firms and individuals. Building on existing rules, a key aim will be to confirm that they should take sustainability matters into account in their investment advice and understand investors’ preferences on sustainability to ensure their advice is suitable. We will develop proposals on this in due course, working with Government.”
As a member of the newly announced Disclosure and Labels Advisory Group (DLAG) set up to help steer this, it would be wrong for me to speculate too much. However, the word ‘confirm’ is quite strong. In addition, FCA research indicates significant client interest in sustainability – and the science points to major risks. So, coupling the FCA’s obligations with existing rules around ‘know your customer’, PROD and risk we can expect advice processes to be under the spotlight.
For those uncomfortable this complexity I recommend books such as David Attenborough’s ‘A Life on Our Planet’ and Kate Raworth’s ‘Doughnut Economics’ – alongside COP coverage of issues like coal, oil and gas, the marine environmental, carbon, methane and hydrogen risks and opportunities – deforestation, food supply chain issue, indigenous people’s rights, greening cities and much more. My point being that sustainability risks and opportunities are complex and dynamic, so upskilling makes sense.
I’ll add here that our free to use (eleven-year-old) fund tool ‘Fund EcoMarket’, which is referenced in CP21/4, helps advisers find funds that reflect client aims – with information supplied directly by fund managers. So this does not need to be too onerous, or expensive.
The science dictates that everything must change this decade.
Government has set out a roadmap and financial regulators are ‘on route’.
Regulated entities will therefore either be part of the problem here – or part of the solution.
The role intermediaries’ and advisers’ play in directing capital makes them central to our future success. So, although this may not change overnight intermediaries should expect to be discussing how the ‘real economy’ works – and concepts like net zero, implied temperature rises, stewardship and transition plans with your clients pretty soon.
Director SRI Services, founder Fund EcoMarket