The ongoing focus on Environmental, Social and Governance (ESG) investment highlights the financial services industry's ongoing instrumental role in the transition to net-zero, through its ability to mobilise capital and engage with investors, companies and citizens.
Yet there still seems to be a large amount of scepticism with investors themselves when engaging ESG investment products and strategies. In a recent survey by the Association of Investment Companies (AIC) whilst 65% of private investors said they would consider ESG when investing, it is the least important factor when choosing an investment.
A reason for this would obviously be the fact that ESG has recently moved from niche to mainstream investment initially due to the United Nations Principles for Responsible Investment (UNPRI). Yet given Responsible Investment can be traced back to the 1800’s with religious groups such as Quackers and Methodists establishing socially responsible investing amongst their followers and the current climate emergency the world now faces, what this points to is a need for investor education.
The good news is Retail Investment Advice (RIA) firms are now engaging ESG. NextWealth’s excellent Financial Adviser Benchmark Report ’21 showcased that 21% of client assets are invested in ESG, ethical, sustainable of impact funds or portfolios which is nearly double the previous year. Client interest is also building with ESG and impact investing coming up in a fifth of client conversations and the majority of RIAs make use of ESG funds or portfolios.
With industry and business interest in ESG strategy, policies and procedures growing, this means that clients will gain confidence and social proof in the benefits for ESG investing.
In reaction to Europe’s Sustainable Finance Disclosure Regulation (SDFR) we also have the latest FCA strategy and discussion paper to consider with The FCA introducing its own Sustainability Disclosure Requirements for firms involved in investment management and decision-making processes. Plus plans to classify sustainable investments into distinct groups may also be aligned with existing SDFR categories.
With a focus on sustainable investment labels and consumer disclosure requirements plus the need to combat greenwashing, we also have a need for acknowledging the role for PROD and client segmentation. This, with the new FCA Consumer Duty, effectively brings the need for a fiducial duty for RIAs and product manufacturers to ensure products are distributed appropriately to meet advice suitability requirements.
This means that RIAs need to make a clear distinction between direct to consumer (D2C) investors and personal investors who require blended, and risk rated portfolios, something surprisingly missed from the latest FCA directives.
When it comes to business management, ESG is also a strategy worth considering particularly with the COP26 conference pushing the climate emergency action to another level.
Model Office RegTech is now updated with the latest ESG regulatory requirements and been ESG rated by The Disruption House’s ESG pathway and scored highly. This should provide our licensed client firms with confidence they are employing ESG compliant technology and showcase such to their clients and regulators.
The ESG sustainability analysis enables Small and Medium sized firms to demonstrate their transparency and commitment to sustainable responsibility. The main areas the system analyses are:
Environmental: Policies, Emissions, Resource Consumption, Energy Management, Renewables and Recycling, Environmental Supply Chain Management
Social: Employee Welfare, Diversity and Inclusion, Employee Engagement, Training and Career Progression, Customer and Community Engagement, Health and Safety, Product Responsibility
Governance: Business Ethics, ESG Awareness, Policies and Stewardship, Board Independence and Diversity, Management Remuneration, Risk Management, Data Security and Outsourcing Management
In summary, with raising ESG awareness amongst clients, increased and incoming regulations for industry participants and world leaders now forced to take action across governmental policies and rule of law, it is a green light for those firms who can showcase their ESG credentials.
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