ESG offerings have grown dramatically over the last 2 years, mostly because fund managers are now required to state their ESG position.  An increased flow of new ESG/Sustainable/Impact offerings is only part of the story though.

The proposed changes will also impact on advice firms, as they will require a change to the advice process, compliance procedures, fund research and Target Market assessments.  Know Your Client will soon need to incorporate an assessment of each client’s sustainability preferences. This will require some client education material, different questionnaires and advisers will need to record each client’s sustainability preferences on file and in the reason why letter.    Firms will need to demonstrate that they have a process in place to deal with a ‘Yes’ answer from a client and, crucially, how to manage a ‘No’ answer (both create different compliance issues).  The changes need to be incorporated into the current MIFID II processes for selecting products and funds (Target Market).

For advice firms, it is critical to develop a robust Compliance process to meet the new requirements.  A single “Do you want it?” question on the Fact Find just isn’t going to work.  Does the client want what? You can’t ask about ESG as the client might want Impact, or Responsible, or to follow the UN’s SDGs or might even want a full ethical screen.  Sustainability preferences cover all these areas and clients need to be fully informed of all the options before being as a more appropriate question…” which, if any, of these different sustainability preferences do you want to apply?”

Firms need to ensure they are not faced with a future “I didn’t know that was an option” complaint from a client which is why education is so important.  There is little point asking a client a question about something that they may not be aware of.  Future complaints will be difficult to defend if the client file cannot demonstrate that the adviser provided enough information to the client to make an informed decision.  This goes well beyond a marketing leaflet from a provider or a fund’s KIID.

Adopting a Triage process to define a client’s interest (or not) in applying sustainability preferences will assist with the firm’s Target Market assessment.  A good Triage will ensure the adviser understands what the client wants from the advice process and ensures that clients do not suffer from questionnaire-fatigue.  A more detailed questionnaire may only be needed if the client wanted Responsible investment, impact or ethical values applied.  Many of those selecting an ESG approach may not need to complete an additional questionnaire at all.

Once Triaged, the adviser can look at appropriate product selection, whether this is an ISA, SIPP or other tax efficient investment options.  Risk issues aside, the sustainable preferences rules for advisers can improve the dialogue on tax efficient products.  This is a space that is innovative and already has a track record in offering investment opportunities focused on positive returns and positive impacts for investors.

Due to the significant changes needed to existing advice processes, fund research etc, advice firms should start work now.  This isn’t something that can be left until the last minute – good compliance doesn’t work like that!  ESG Accord can provide advice firms with a bolt on compliance process to cover the new rules, including Triage assessments, appropriate questionnaires, client education material, web site statements, Due Diligence process/questionnaire and reason why letter wording.

Lee Coates OBE spent over 30 years running Ethical Investors, an advisory firm specialising in ethical and sustainable investing. Today he works with ESG Accord to help advisers meet the challenges and opportunities that they now face with ESG and Sustainable Finance.  (



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