ESG regulation changes

Over the last few years, there has been a wave of legislation and regulatory changes aimed at promoting more responsible and sustainable investing. To date, this has predominantly impacted asset managers and other institutional investors. This could change as regulators contemplate investment advice and ESG considerations:

• Within the FCA’s Climate Change and Green Finance Feedback Statement (FS19/6), the regulator specifically commented on advice:

‘In assessing the suitability of investment decisions for clients, advisors are required to gather sufficient information so that they can make recommendations to or decisions on behalf of clients that meet their investment objectives. This can include the understanding of clients’ sustainability preferences. However, it is not mandatory for ESG issues to be considered under the current suitability regime.’

• The European Commission has expressed that it wants to make ESG investing easier across Europe. A proposed change to MiFID II legislation relates to investment suitability whereby firms will need to take account of clients’ ESG preferences when assessing their investment objectives. Further to this, the EU is proposing some supplemental wording within Regulation (EU) 2019/2088:

‘Financial advisers should disclose how they take sustainability risks into account in the selection process of the financial product that is presented to the end investors before providing the advice, regardless of the sustainability preferences of the end investors.’

The EU rules are expected to come into force at some point in 2021. It is widely anticipated that the FCA will stay close to the EU in this area.

Whether or not it becomes mandatory for advisers to take account of a client’s ESG preferences when assessing suitability, it is certainly good practice to address this within the fact-find and annual review process. We’ve made some suggestions for fact-find questions.

Important Information :- Please note that the value of investments and the income from them can go down as well as up so your client may get back less than they invest.