Helping advisers help their clients on ESG

While many financial advisers are sceptical about the claims made about environmental, social and governance investing, they recognise the need to talk to clients about their ESG preferences. The AIC’s ESG Attitudes Tracker research shows that a majority of investors invest with ESG issues in mind, even if that percentage has moderated over the past couple of years. In any case, the Consumer Duty regime requires advisers to assess whether investors want to take these issues into account when making investment decisions.

However, when it comes to collective funds these conversations can be difficult. It is not easy to present investors with clear and consistent information about the ESG attributes and behaviours of funds when fund managers don’t provide these disclosures in easily comparable ways.

Research into the investment companies sector just published by JTC Group reinforces the point. It looked at 375 funds and found very different approaches to ESG reporting and disclosure. Some funds issue much more detailed ESG disclosures than others – and 87% do not publish a dedicated ESG report.

Also, there is no clear consensus on which reporting standards investment companies should use. While 78% of investment companies have adopted the United Nations Principles on Responsible Investment, and report accordingly, the next most common standard, the Taskforce on Climate-related Financial Disclosures, is in use at only 23% of funds.

Clearly, this has the potential to make life difficult for advisers who are trying to present clients with an informed view of the ESG profile of investment companies in which they might be considering investing. Naturally, investors want simple data and reporting that enables them to compare like with like – advisers want to be able to give them exactly that.

The good news is that these issues should ease over the course of 2024. Most investment companies are covered by the new Sustainability Disclosure Requirements (SDR) that come into force later this year. The most important element of this regulation is that any fund wishing to give itself one of four sustainability labels – essentially different ways of describing itself as a sustainability-focused fund – will have to meet certain tests.

For example, 70% of assets will have to be invested in line with the fund’s sustainability objectives. These will need to be tested against a specific standard that is widely accepted as robust and reliable. Labelled funds will also have to publish a short and clear document for consumers setting out their sustainability metrics.
Another part of SDR is that it attempts to tackle greenwashing – the attempts by some in financial services to claim their products and services are more sustainable than they actually are. An outright anti-greenwashing rule aims to confront this problem head on. Also, any fund using sustainability-related terms in their name or their marketing will have to publish the same document for consumers as labelled funds are required to produce.

Once this regime is up and running, advisers should find it much easier to talk about the sustainability credentials of funds to their clients, including investment companies. In particular, any fund that claims to be investing sustainability will have to set out much more detail about that that actually means. And funds trying to piggy-back on the trend for sustainability will find it tougher to do so.

All of which is good news for investors, where there is some now evidence of a backlash against the ESG movement amid suspicions around marketing hype and greenwashing. If advisers can work with clients to guide them towards funds that fit with their ESG preferences – and to avoid funds trying to pull a fast one – so much the better.