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Advising clients on sustainable investing

Establishing whether a client has any sustainable investing preferences or not is no longer an optional exercise. Rules and regulations are now in place that make this mandatory. Here we share some practical tips on how you could approach this.

Establishing a client’s investment preferences

The FCA’s PROD and COBS rules, now part of the overarching Consumer Duty rules, require all advice to be based on product target markets and client segmentation. What’s more, advisers need to ensure they have gathered information on a client’s investment preferences and objectives, to ensure they are delivering good client outcomes.

The Consumer Duty also requires firms to ensure that any given client is making an informed choice. As such, an adviser needs to assess whether their client would like their investment choices to take account of any ESG, sustainable or values-based criteria. Equally, an adviser needs to show that the client has made an informed choice to adopt a conventional investment strategy – avoiding any ESG/sustainable options – where this is the case.

A three-step approach to the advice process

ESG Accord, a technical compliance firm specialising in investment preferences and objectives, recommend that firms divide their advice process into three distinct parts. This is based on their analysis of the rules and their ongoing conversations with the FCA:

  1. Fact find – gather the facts that relate to each client
  2. Attitude to risk – assess the client’s attitude to risk and capacity for loss
  3. Investment preferences and objectives – based on the client making an informed choice, apply the client's investment preferences and objectives to the information gained from the fact find process and the client's attitude to risk and capacity for loss.

Importantly, as can be seen from the above, any sustainable/ESG preferences or considerations are gathered in a separate exercise. This is because there is a risk that too many areas will be missed if these elements are included within a fact find form.

Only by showing that all three areas highlighted above have been part of the advice process can it be demonstrated to the regulator that the outcomes match the client’s needs.

Fidelity is delighted to be partnering with ESG Accord to deliver the Accord Initiative web site. Here advisers can download a free to access full suitability framework for investment advice that is both Consumer Duty friendly and ready for the FCA’s Sustainability Disclosure Requirements (SDR). Using this framework ensures advisers ask the right questions, in the right way at the right time. Advisers will then have the all the information needed to input into our Sustainable Investment Finder tool – providing a fully joined-up process built to deliver good client outcomes.

The FCA have issued a factsheet for advisers (FS021) that covers knowing your customer and addressing their needs. It highlights some of the good practices it has seen at firms when assessing clients’ needs. It also shows that the FCA feels there should be a separate process for obtaining any values-based criteria.

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Ask the expert

Assessing clients’ sustainable investing requirements can be complex. To help you gauge what the right approach might be for your firm, we pose your questions to Lee Coates, co-founder of ESG Accord.

Fidelity’s Sustainable Investing - Report 2023

This report outlines the standards and tools we use as investors when acting on our clients' behalf, across all asset classes.