Richard Cooper of the LIBF, argues there’s never been a better time to talk to clients about ‘environmental, social and corporate governance’ (ESG) in pensions and investments.
It’s a good idea for advisers to start a meaningful discussion with clients about their views on climate change. That can lead to a wider conversation about how their feelings and opinions about ESG might impact their choice of investments over the short, medium and long term.
As things stand, the direction of travel is clear. Recent campaigns like Make My Money Matter – co-founded by Richard Curtis and Jo Corlett – are highlighting the difference that pension savers can make. As they have identified:
• there is £2.6 trillion invested in UK pensions
• greening your pension is 21 times more effective at reducing your carbon footprint than giving up flying, going veggie and switching energy provider combined
• 68% of UK savers want their investments to consider people and planet alongside profit.
• evidence shows that sustainable, resilient, well-run companies are more likely to perform better in the long run.
However regulation is on its way too and, as a financial adviser, you’d be wise to be ready for it.
Regulation and climate change
The UK Government has already:
• legally committed to a target of net-zero carbon emissions by 2050
• committed to make climate-related disclosures mandatory across the economy by 2025, with most requirements coming in by 2023.
• Changes to reporting and disclosure requirement are being proposed and are due to commence on 1 January 2022. You can find details of the proposed changes in the Financial Conduct Authority (FCA) Consultation Paper FCA’s recent consultation paper.
Meanwhile, the EU is developing its Sustainable Finance Disclosure Regulation (SFDR) – a set of rule to make it easier for investors to compare and understand the sustainability profiles of funds.
The SFDR forms part of the EU’s Sustainable Finance Action Plan, which the UK Government has agreed to match in ambition.
All these new ESG-focused regulations will help link sustainability and suitability, bringing investment propositions more into line with the government’s climate action plan.
Climate change and financial advice
So, as a financial adviser, you have to start thinking about this issue. At the very least, you’ll need to understand the core matrix that’s being proposed for disclosure and work out how best to discuss it with your clients.
While the regulatory element will force some change, for you the priority will still be to understand your client’s views, thoughts and feelings.
Under the proposals all funds will have to show their ratings – not just those labelled ‘ESG’.
That means it’s going to be increasingly important to have a clear and detailed understanding of your clients’ views on environmental sustainability and climate change.
In a couple of weeks, COP26 will have concluded. But climate change and the increasing role of ESG in pensions and investments will be with us for some time to come.
