Why paraplanners need to get ahead of sustainable finance rules

6 April 2022

Paraplanners need to to get ahead of sustainable finance rules, says Lee McDowell, Head of Business Development, Psigma Investment Management. Here’s why.

Interest in Socially Responsible Investing (SRI) is gathering momentum, and with COP26 ending with a global agreement to fast-track action on climate change this decade, it will only accelerate further.

One driver is the rising investor demand for funds that achieve a dual purpose – to generate attractive returns but also have a positive impact and make the world a better place. Another key driver is new regulation on the horizon that will further support this growth.

While paraplanners and financial advisers all have responsible or sustainable investing on their agenda, many are aware they need to deepen their knowledge and understanding in this area.

A recent poll found that Environmental, Social, and Governance (ESG) was one of the top five issues paraplanners needed more support and training with, and with new regulations coming soon, the need is becoming more pressing.

Understanding the changing regulatory environment

The FCA is increasingly focused on Sustainability. This extends into compliance procedures for advisers and paraplanners. Across the regulatory landscape, ESG and Sustainability are already deeply rooted in existing regulations (such as COBS and PROD), as well as in new incoming regulations: Consumer Duty, Sustainability Disclosure Requirements, and the new Fund Label regime.

As part of their contribution to deliver the government’s Roadmap to Sustainable Investing, the FCA released DP21/4 – Sustainability Disclosure Requirements and investment labels. This has significant implications because the labels are set to cover all funds, including non-sustainable funds.

The combination of existing and incoming regulations means that advisers need to include their clients’ ESG and sustainable preferences in their fact-finding processes, in an in-depth and meaningful way. They will also need to demonstrate how they include sustainability factors in their policies and procedures, and to understand the nature and impact of funds/products selected for clients. For many firms, this means introducing or upgrading processes for initial meetings and annual reviews – and this is where they will need support.

It is not enough to simply ask clients if they are interested in ethical investing. Advisers will need to understand their clients’ sustainable preferences in the same way they understand their risk preferences to make informed recommendations.

Getting ahead of regulatory requirements

At Psigma Investment Management (Psigma), we are committed to helping advisers and paraplanners negotiate this complex area. We are encouraging the advisory firms we work with to start preparing for these regulatory changes now, so that they can expand their knowledge and be in a position not only to reassure clients but to help them navigate the different terminology and better understand how sustainable their investments really are.

A key part of our SRI offering lies in the education and training we provide for advisers, but we also work with specialist firms who complement the training we provide.

One partner is ESG Accord, a company set up in 2020 by Lee Coates and Elly Dowding to address the compliance gap faced by financial advisers in the areas of ESG and Sustainability. They are helping advisers with all aspects of compliance for ESG and sustainable investing.

To help advisers get ahead of the regulatory changes, ESG Accord has created a compliance framework they can use to draw out and process their client ESG/Sustainability preferences. The framework supports advisers throughout the client fact-finding process, ensuring they ask questions that will elicit accurate information about their sustainable investment preferences that truly reflects their clients’ values and needs.

This process helps advice firms to prepare for the compliance challenges ahead – the framework is in line with current PROD, COBS and incoming Consumer Duty requirements. ESG Accord also is pushing to introduce a ‘label’ regime, to ensure a uniform approach across products that fully serves the needs of retail investors.

Their work has been recognised by the FCA, and they are part of DLAG (Disclosure and Label’s Advisory Group) set up by the Government and the FCA to inform to inform the Sustainability Disclosure Regulations.

They have also launched an ESG and Sustainable MPS Report to help bring transparency and accessibility to this process. The report, which is free to access for advice firms, outlines the ESG/Sustainable MPS offerings available to financial advisers and paraplanners, and outlines the ESG and Sustainability objectives, characteristics and strategies of each proposition. This allows the matching of the different MPS offerings with each client’s ESG and Sustainability preferences and objectives. According to Lee Coates, advisory firms need to act now to get ahead of new regulations as change is coming soon.

Working with ESG Accord

We are looking forward to the publication of ESG Accord’s report, as it will give our advisory contacts guidance in ensuring that they make the right choices for their clients.

We are always looking for ways to train and educate the advisers and paraplanners we work with, and the work that ESG Accord is doing is helping advisers and paraplanners support their clients in truly understanding what can be a confusing area of investment, but one that is very much on the rise.

Like ESG Accord, we believe the advisory market is entering a brave new world, and like it or not, sustainable finance rules are coming. Advisers that get ahead and achieve the best compliance in sustainable finance will be the ones that better engage their clients with sustainable investing and ultimately, improve their outcomes.



Professional Paraplanner