ESG regulation is going places- are you on the right path?

Our CPD “Talking ESG” webinar offered much food for thought on the subject of ESG regulation. Here’s a reminder of the panel members and an outline of the main conversation topics.

The panel

Natalie Holt – Content Editor, The lang cat (Host)
Rebecca Kowalski – Founder, Overstory Finance
Lee Coates – Director, ESG Accord Ltd
Alasdair Coutts-Britton – Owner, Better World Financial Planning Ltd
James Dalby – ESG Lead, Aviva

Green finance strategy

James Dalby gives an overview of the current regulatory climate, detailing the UK’s decision to create its own ESG framework, named the Greening Finance Strategy. Within this a key regulation is the Sustainable Disclosure Requirements and Investment Labels – a consultation by the FCA on this is expected in the summer. James says this regulation is

"specifically relevant to product providers and platform providers – it’s a critical phase we’re in at the moment."

However, James doesn’t feel it will clarify every aspect of incorporating ESG, or even lead to a universal labelling criteria for all funds:

"I think it will very much focus on labels for funds that are specifically around sustainability, so expect there will be a swathe of existing funds and new funds in the future that will still sit outside these labels but will still have very strong ESG characteristics."

Alasdair Coutts-Britton talks about expectation versus requirement, saying ESG  should be part of every adviser’s fact find with a client, even though it’s not yet required. He emphasises the need to ask open questions – ESG should not be something you just say yes or no to.

"Unless you actually ask a client open ended questions, you might find that people have got opinions and views which you wouldn’t otherwise know about."

As Alasdair makes clear, an adviser needs to have this conversation with their client, but it’s up to the adviser how in-depth and detailed this conversation is. He points to a number of available fact finding ESG questionnaires as a starting point.

The company view

Rebecca Kowalski comments that companies who are well established often want to fit ESG into their current structure, instead of adapting to include ESG. Rebecca finds that companies’ main concerns are around picking the right funds, mapping them to the client’s preferences and then justifying those choices to the client:

"It's not just a case of getting a list of funds from a research tool – there are a lot more layers than that."

Lee Coates works with companies to incorporate ESG into their processes:

"We look at it from a “What’s now and what’s coming” perspective and how you adapt your firm to those two scenarios."

Lee makes the point that advisers need to look at creating the best possible outcome for the client but also ensure the best possible outcome for the firm too, protecting itself from future complaints.

He has a crucial piece of advice for firms when it comes to showing ESG due diligence –

"If it isn’t on file, it never happened and it doesn’t exist."

Telling the FCA the client has no interest in ESG because they’ve never mentioned it is not good enough. Unless a file has a statement from the client saying they have no interest in ESG and do not wish to discuss it, anything else is not good enough when it comes to demonstrating client views on ESG.

How far do you go with ESG?

Natalie asks the panel how in-depth advisers should be when discussing ESG: should they be asking about individual client preferences or about general views on sustainability?

Lee answers that in his opinion,

"it’s less about the questionnaire and more about the conversation."

Lee feels the conversation needs to come first, talking with the client about their views on ESG-related topics. This gives the adviser an initial steer on how important ESG is to the client and if so, which areas they are focused on particularly. The adviser can then use this information to generate a questionnaire asking more detailed questions about those specific aspects of ESG.

Alasdair recommends outsourcing some client preferences to a specialist in that field: if a client has very definite views, they need expert investment advice.

This also raises the question of how companies and funds are ESG-rated. In Rebecca’s opinion, the way a number of factors are rated within ESG are subjective:

"It varies from manager to manager and ratings provider to ratings provider, so you’re never going to get total consistency."

James says Aviva uses a number of different, independent data providers, one of which has  over 400 data points for mapping funds, showing how complex ESG can be. The FCA is currently taking a close look at the data companies who provide information on individual stocks within portfolios.

Are we looking at ESG in the wrong way?

Alasdair believes we should use ESG as a filter or research analysis tool, not an indicator of whether a company is “good” or “bad” in the ESG arena:

"ESG is really more to do with operations as opposed to impact: analysing risks that ESG has on a particular company rather than the risk that a particular company has on the world."

It’s more about companies having the least negative impact, rather than being actively beneficial within its ESG sphere. Alasdair also believes we need to change how we view the way ESG ratings are calculated; looking at what they’re rating and how they’ve reached their conclusions.

Natalie asks how easy it is to navigate ESG when views are subjective and some data outcomes are contradictory. Lee is very definite on this point:

"This is not a science – there is no right or wrong."

He advocates using conversations to establish where the client sits on the ESG spectrum and strongly advises against using a tick-box style of questionnaire, which ultimately produces an “answer” – the subjective nature of ESG makes it almost impossible to achieve this.

Rebecca recommends looking for a solution that fulfils the majority of the criteria, by looking hard at the options and challenging data scores:

"Be prepared to do lots of research and ask lots of questions. If you don’t get answers, walk away [from that fund] immediately."

Get the full conversation, on demand

If the snippets above have whetted your appetite, why not watch the webinar in full? It’s available on demand now – just click on the link and register your details to access the webinar. The recording is eligible for 45 minutes of CPD.