Will the Government’s Greening Finance Strategy make far reaching “sustainable” change to Retail Wealth advice?

Does the looming energy crisis and race for Downing Street mean the Government’s well intended Greening Finance Strategy has been blown off course, or will we see a “sustainable” change to Retail Wealth advice?

Prior to the recent political events the Government had laid down a clear path towards their ambition for the UK to continue leading the way internationally regarding climate change, backing that ambition with detailed plans and roadmaps.

For anyone in any doubt about the scale of this ambition, you don’t need to look much further than the Green Finance Strategy* published back in July 2019, and the follow up paper published in October 2021, Greening Finance: A Roadmap to Sustainable Investing*. within which the then Chancellor, Rishi Sunak MP, was very clear that climate and environmental considerations should be “central to the decision-making process of every UK board and every investor’s risk and return calculation.”

So what now? Do we sit on our hands until we have a clear outcome of the leadership contest - and whether the pledges made to gain votes actually turn into anything more than that - then wait until a new world order evolves around alternative energy supplies, and whatever impact that has on global prices and markets? 

Clearly the impacts of these events are already causing angst and volatility in the markets, and ironically, we are also experiencing an extreme heatwave with weather charts the likes of which the Met Office has never seen. However, if we take a moment to revisit the work already done, it is clear that there is still significant effort required to deliver the changes needed, and that this is not just an industry issue. 

The first phase of the Greening Finance paper explains and lays out clear plans to address the “information gap” with a mandatory set of strict disclosures across the UK economy (Sustainability Disclosure Requirements). These will be aligned to international standards, as well as the UK Green Taxonomy, to ensure the UK meets its committed targets.

The term ‘Green Taxonomy’ essentially describes a system which categorises environmentally sustainable economic activities. The UK Green Taxonomy is expected to follow the EU framework, where certain companies will be required to disclose which of their activities (and what proportion of these) are Taxonomy-aligned and will be based on the UK’s environmental commitments towards net-zero. For example, a company may be viewed as either making a substantial contribution to the environment, or not doing any significant harm.

These disclosures are an important part of eliminating greenwashing and establishing a common framework, which is why the Task Force on Climate-related Financial Disclosures (TCFD) was formed by the Financial Stability Board in 2015. The FCA finalised its TCFD aligned disclosure rules as early as December 2020, and the Chancellor has committed to making these fully mandatory by 2025.   

Provisions have already been made for a financing programme of some £10bn to kickstart the changes needed. Whilst the FCA’s disclosure and labelling framework (to ensure that investment decisions on sustainability are based on factual information) has been delayed, this is only until September 2022, suggesting much of this work has already been done.  

Once these elements are in place, the groundwork is then laid for the latter two phases: how the information available is acted upon, and whether the required shift in financial flows is on track. So we already have a framework in place for the Sustainability Disclosure Requirements (SDR) and know what they will look like at corporate, asset management and product level. The paper also directly references the important role financial advisers will play in this transition:  

              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.

So whatever the outcome of current political and macro-economic events, I believe it is naïve to suggest that ESG is at some kind of breaking point. If anything is at a breaking point, it is the time available to protect our planet and current events are only accelerating the problem! What recent events do allow us as an Industry (thankfully) is a little bit of breathing space to get our house in order. 

The two major takeaways we have from the Greening Finance Paper are: firstly, advice firms will need to adapt their current processes to establish specific preferencing in a conversation with the client, including how to compare those preferences with existing portfolios; secondly, the FCA consider this to be building on existing rules rather than a new development! This point in particular seems to be in complete contrast to current market practice for many advice firms. Why is that? 

Generalisation can be both dangerous and misleading on issues such as this, so if this cap doesn’t fit, please accept my apologies. From several conversations I’ve had, it appears to me that many advisers are reluctant to engage on this subject, maybe because they are:

  • not confident in discussing sustainability issues with clients, or 

  • don’t want to come across as too evangelical, or

  • clients just aren’t interested(!), or 

  • current processes within the firm don’t allow this information to be captured easily, or 

  • they have no means of shoe-horning this information into their current Centralised Investment Process, 

  • or possibly even all the above!    

Of all these reasons, the one that mystifies me the most is that clients are just not interested! Really? So, if they discover their assets are invested in countries with appalling human rights records, or in firms that are creating a huge amount of damage to the environment, or marine life, or slave labour, is it really true that they just don’t care – despite the very same people donating billions to charity every year? This is also in complete contrast with the FCA’s own research in their Financial Lives Survey published in DP 21/4, which found:

  • 80% of respondents wanted their money to ‘do some good’, while also providing a financial return 

  • 71% wanted to ‘invest in a way that is protecting the environment’ and 

  • 71% would not put their money into ‘investments which are unethical’

Clearly there are several barriers preventing advice firms adapting their business processes. Many will require significant education, as well as procedural change, and maybe with some breathing space we can prepare ourselves as a profession for what is inevitably coming down the road; let’s get ready as best we can, as this one is going to take time to properly weave into the retail advice space. 

In the meantime, I hope that when we finally see more detail on the formal proposals resulting from DP21/4 sometime later in the year, it will give us more clarity around what fund labels can be used, the minimum criteria and descriptions for them, and perhaps some common standards for rating agencies to adopt. This may even lead to a few fund managers needing to re-badge their funds (again!), and a possible proliferation of ESG-orientated model portfolios and/or discretionary solutions to meet a range of sustainability preferences! 

A number of specialist compliance firms have already produced some great work to help advice firms shift towards integrated ESG advice. My own firm, Aviva, have also been very active in this space in developing a tool which does much of the heavy lifting by using MI currently available to assess clients’ existing portfolios against a range of sustainability measures at product, fund and constituent company levels. The tool also allows advisers to capture clients’ current preferences and now has reporting functionality to boot. It will continue to evolve as the availability of MI increases, closing the Information Gap. Expectations are that such tools will become part of mainstream practice for advisory firms going forward. 

Looking to the future I have no doubt that more tools will emerge to industrialise the process of aligning sustainability measures with risk-profiles and appropriate fund solutions. A new world with more sophisticated centralised investment propositions will emerge with this new ESG lens, so I would urge all firms to engage at the earliest opportunity. It will take time, not only to develop the solution, but moreover the appropriate skills around discussing ESG preferences which is set to become a mainstream advice requirement and will enrich client engagement when done well.    

Duncan Singer, Divisional Manager, Aviva

*Contains public sector information licensed under the Open Government Licence v3.0
Open Government Licence (nationalarchives.gov.uk)