The green frontier: navigating the new SDR regulations

Paul Richards: Good morning, all. We're just waiting for a few more people to join, but I think we'll get cracking promptly at 10 o’clock. Thank you for joining us today for our latest webinar, where we'll be discussing sustainable investing. In today's discussion, we will primarily be focusing on how regulation, including the new Sustainability Disclosure Requirements, or SDR, will impact advisers and their clients.

The SDR is an important piece of regulation which aims to ensure that financial products marketed as sustainable do as they claim and so will no doubt shine a light on sustainable investing as we move forward. We'll look at other issues affecting the market, such as some of the announcements made at the recent UN climate change conference in Dubai, that's COP 28, and we'll also examine the shape and health of the sustainable investing market in terms of industry trends.

I'm joined today by a highly qualified panel of experts. I’m delighted to welcome, firstly, Amy Clark, Co-Founder and Chief Impact Officer of Tribe Impact Capital, Lee Coates, Founder of ESG Accord, Julia Dreblow, Founder of SRI Services, and Matt Jennings, who is Investment Director for Sustainable Investing at Fidelity.

Now, in terms of the practicalities today, we won't be taking any live questions, but many of you have pre-submitted questions, and as ever with these things, we'll try and get those answered for you during the course of the webinar.

01:13

So, we've got 45 minutes, approximately. We got loads to get to and if I can start, Julia, with a question just to set the scene, really, in terms of regulation. There's been a whole raft of regulation culminating in SDR, so can you remind us of where we come from and where we are now from a regulatory perspective, please.

01:32

Julia Dreblow: Sure. Thank you, Paul. So, this goes back quite a long way. Essentially, the ball started rolling in terms of the SDR around about 2,000, although I was discussing and other people were discussing the problems in the market before that. So, in 2,000, the FCA launched some principles which highlighted some problems that they were seeing in the market. For example, clients being misled, the confusion around the market, and the need to basically tidy things up and move forward.

What then happened over the following years was that we had a Discussion Paper and a Consultation Paper, and that ended in the actual rules going live in November last year. A lot of information was drawn on, though, in order to bring those new rules into being, and a really important part of that was their Financial Lives Survey that they've been carrying out, which has shown growing client interest in sustainability and concerns around the issues. And where we're at now is something like 80% of people actually wanting to consider sustainability issues, like climate change, when their investment decisions are being made. And that obviously aligns very well to the Net Zero policies that the Government adopted way back in when, 2,015, which was really the very origins of the SDR, which is, we've decided we need to do something about climate change, this is a massive risk, what do we do? So, there's the greenwashing element, there's the Net Zero element, there's the how do we steer the market element? And then the client research.

03:02

Paul Richards: Okay, thank you. I'm afraid to ask stupid questions on these webinars, but SDR and SFDR are the same thing or are they different?

Julia Dreblow: No. So, they’re slightly different. So, they have the same origins, because if you go back to the early 2010s, the conversations were obviously pre-Brexit, and people like myself were indeed in meetings talking with the EU, and we all recognised that something needed doing. The UK's line then obviously was very much “keep it high level and principles, and don't get too prescriptive”, whereas the slightly more technical, academic approach of the EU was, “no, let's tie it down with really tight rules”. So, what we saw was these two different approaches which then went their own separate ways, and, of course, because of Brexit, we landed up with ours being a little bit later. So, ours is more principles-based, theirs is a lot more prescriptive, ours is intended to help end-clients – individual investors – and to solve the problems. Because if we can solve problems on the ground, we can get to a different place, whereas theirs was seen as needing to classify assets and be very, very precise. It’s just proven a bit difficult.

04:11

Paul Richards: Thanks for that. Very, very clear. Lee, if I could come to you now. Our advisers and whole market have been swamped with regulation and the biggest piece of regulation we've seen in the last few years has been Consumer Duty, of course. So, can you explain to our advisers, please, how the SDR and the Consumer Duty interact with each other and what it all means for advisers and their clients?

Lee Coates: Sure, thanks, Paul. Well, if you see Consumer Duty as the overarching piece of primary regulation that is being driven by the FCA, then SDR just comes along and slots underneath it, and then it becomes part of all the cross cutting and interaction of all the existing rules. So, COBS and PROD haven't gone, they exist under Consumer Duty. SDR is new, it exists under Consumer Duty and, as Julia said, the whole point is, from the FCA’s perspective, is financial services delivering good outcomes for clients.

Now, in order to establish under Consumer Duty whether good outcomes have been delivered, an integral part of that is understanding client needs and investment preferences and objectives. To do that, you need to demonstrate you've asked the right questions at the right time in the right way. So, we often hear that, “oh, my clients are not interested in ESG or not interested in sustainable” and that sort of thing. Which is fine, if it's true, and the only way it can be deemed to be true is if every single adviser has asked every single client the right questions, at the right time, in the right way and that's all documented on file.

And then the problem is, that what's happening in the market now doesn't reflect the figures that Julia mentioned – in the FCA's head, 80% of the public want to invest to do good, whatever that may mean. But about 8% of the flow through advisers is going into good, sustainable, ethical, responsible, or whatever. So, there's a massive disconnect, and the disconnect is happening at the advice process, and, therefore, under Consumer Duty, challenges arise about being able to demonstrate, because Consumer Duty is data-driven, how advisers have reached good client outcomes if there are gaps in the advice process.

06:36

Paul Richards: So, I'm sensing, if I'm hearing what you say correctly, that you think advisers aren't necessarily doing this properly or thoroughly enough at the moment, or have I misinterpreted what you’ve said?

Lee Coates: I wouldn't go as far as not doing it properly. I spent 30 years an IFA, because we all do it properly. No, I think it's just a perception that a lot of sentiment around SDR, ethical, responsible, sustainable, has always been the “other”. And if you create it as an “other form”, then the other thing is for people who want it and then the logic therefore goes, “if they want it, they must know about it, and if they know about it, they'll ask for it”. And that's, I think, where the problem lies. Not IFAs deliberately saying, “oh, that client wants sustainable, but I'm not going to let them have it.” It's more about actually going on the front foot rather than the back foot.

It's not the job of a client to pay to go to an IFA and then do all the homework before they come and say, “I've researched the market, this is what I want”, because if they do that they can go direct. It's the clients who don't know what their options are, and therefore the advisers have to bring this “other”, this sustainable and ethical thing, and bring it into the normal advice process and prove, if it's the case, that 90% of their clients don't want it – the FCA figures are wrong – 90% of their clients don't want sustainable or ethical, if that's true, and they can provide the evidence to the FCA that that’s correct, because they've had the conversation in the right way with clients, is documented, and therefore they deliver good outcomes.

08:11

Paul Richards: Do you think the regulator is going start looking more deeply into how advisers are tackling these issues?

Lee Coates: Yes, because it's a double-edged thing. How does the FCA prove to itself that the industry is properly implementing, broadly, Consumer Duty? One way to do it would be, “how does the industry demonstrate that clients are making an informed choice?” It's quite a nebulous question, it's a key part of Consumer Duty. Where you could do that is by saying – the FCA doing desk monitoring – saying, “okay, we'd like to know what your process is for monitoring clients making an informed choice. For example, what's your process for discussing ESG, sustainability, and the sustainability labels and recording client understanding of that conversation?”

09:03

Paul Richards: That's a superb segue into the next question. I'm going to bring you into the conversation now, if I may, Amy, and that's in the context of these investment labels that are clearly an integral part of SDR. Can you explain what those labels are all about, and how specifically this is impacting the way asset managers are managing client money?

Amy Clarke: I'll start with the second question first. We're slightly self-selecting as a business, because all we do in terms of the types of products and the type of investment thesis that we have is about good risk management, focusing on those companies that are driving us towards a fit and sustainable future. So, as a result, we really only focus on those types of funds and those companies that reach very high levels of sustainability performance, and who can demonstrate that they are creating long-term positive impact for people and planet in the pursuit of obviously driving profit as well. So, the fund managers that we work with have a very similar view on this is just good risk management, focusing on enhancing and embracing the opportunity to drive the next generation, future-fit businesses of today and tomorrow, rather than necessarily focusing on those from today and yesterday who potentially are resisting attempts to become future-fit. To put it politely.

So, I think the conversations that we have had with the asset managers we work with have been incredibly positive. You know there's a massive amount of support for SDR. A huge amount of support for the labels. We were all involved in the consultation period. Obviously, we have Sustainable Impact, Sustainable Focus and Sustainable Improvers. They are non-hierarchical and they're designed to be non-hierarchical, because there are different forms of impact that you can get in each of those classes. We now have a new label, Mixed Goals, which is for those types of products that may have bits of Sustainable Impact, bits of Sustainable Focus and bits of Sustainable Improvers, within that product, so for example, like a multi asset fund.

So, the labels are designed in many ways to drive different types of outcomes in the pursuit of different forms of sustainability. So, Improvers, really supporting those companies who need to transition to what we would refer to as future fitness. So, those companies who are not really on top of managing the risks that are posed to their companies, or the risks that they are posing to people and planet more generally. And there's a huge amount of impact to be had in transitioning those companies, in helping them become future-fit, we have to recognise that.

11:55

Sustainable Focus is really about looking at those companies who are managing and running themselves really well. And who ultimately may not necessarily be what we would refer to as solutions providers. They're not necessarily wind turbine manufacturers, but they are managing their sustainability footprint well, really well, almost to that sort of “do no harm” as a minimum standard.

And then Sustainable Impact is all about that additionality that you can get where you're really focused on companies who are really well run and who have got the solutions to some of these wicked social and environmental problems. I apologise because I'm being really reductive here to try and make it very, very easy for people to understand. But here you are really focusing on the companies who are going to really drive the change in terms of the products and the services that we are using on a day-to-day basis, but also running themselves really, really well.

It’s a little bit reductive, but you can kind of think of it in those categories. And obviously there is different impact in all three of them. As I said, we're a little self-selecting in terms of what we do. So, the fund managers we are working with, the overwhelming majority of those funds that we work with, are qualifying as Sustainable Impact. And that's because of our view on what is going to drive the right type of growth that benefits everyone and everything as well. We have actually spoken, and this might segue, Paul, quite nicely to one of the questions we had around passives.

13:35

We have been speaking to some of the large investment houses, just as a general part of our advocacy and marketplace capacity building, around passives and their qualification – and I think there's a little bit of a misunderstanding in the market at the moment that passives don't qualify into SDR. Well, they do. But the bar has been set very high for very obvious reasons. So, it's really interesting speaking to a lot of the larger asset managers who obviously have huge product ranges in passives. The smart ones recognise that there's a first mover advantage in looking at those passive vehicles that they have that can meet the bar that has been set. Julia has been involved in this for such a long period of time, she is far more equipped to be able to talk about some of this than I am. But to move those products into SDR qualification, there's a massive opportunity there for the fund managers and the houses who are willing to do that, but quite rightly, the bar is set incredibly high to enable us to have the confidence that those sustainability outcomes are being delivered.

14:48

Paul Richards: Okay, thank you. I'll come back to passives in a moment, if I may, but you mentioned then the difficulty of understanding – and you use the word reductive in terms of making it more understandable – but it strikes me that this is quite difficult for advisers as well as their clients, particularly when they're incorporating these new approaches into the way they run money currently, and we had a question from one of the advisers who joined today about how this type of investing fits in when an adviser is running a model portfolio, maybe themselves on an advisory basis or outsourcing to a discretionary fund manager. Do you see any challenges? That's not specifically going to be you, Amy, it’s directed at the group, really – because I think practically, this is one of the things I hear regularly when talking to advisers in their offices.

Amy Clarke: Yes, absolutely, it can be quite complex in many ways, and I think actually coming back to the conversation Julia and Lee were having earlier about the interface between SDR and Consumer Duty, obviously Consumer Duty is very much anchored in the notion of fair, misleading and clear communication to the end wealth owner/holder. And SDR is focused on driving outcomes, sustainability outcomes and sustainability alignment, obviously suppressing greenwashing as well, in an area where there's an awful lot of language that is quite technical as well.

So, there's a real, I think, pressure in the market now to take a lot of the complexity that comes through investing through the lens of sustainability for impact and all of the vernacular we use, for example, climate risk, task force for climate-related financial disclosure, all this kind of other regulation and frameworks and everything that's coming in, we have to find a way, both as DFMs and as fund managers, to communicate that in a way so that IFAs actually understand what it is that we are talking about, especially with, for example, model portfolios, that enables them to then have the conversation with their clients in a way that is, not necessarily reductive, but ensures that it's clear at all times, it's not misleading, and at the end the wealth holder knows exactly what they are buying into and what the level of performance is likely to be as a result, and that is an art, I think, in many ways, it's going to be an art form. So, as an adviser, you want to know that you can work with a fund manager, or model portfolio provider, who is very, very conversant and fluent in all of the different languages that now sit and inhabit the heart of finance, and is therefore able to play it back in very simple but very clear terms, so as to not mislead, to facilitate a very, very enriching conversation with the end wealth holder as well.

17:47

Julia Dreblow: Shall I jump in and add an extra development that some people may be aware of, which is that the FCA has tasked an industry-led group to sort out what help advisers need. So, it was always known, within SDR, that advisers we're going to need help here now. They're either going to regulate or they are going to try and get it through from the industry. So, Daniel Godfrey is chairing that group, and I'm vice chairing it, and we're in the process at the moment of setting up a steering committee, and then, once that's live, we will bring in other people to help feed in and do lots of consulting and talking to people, because we want to make sure that we're actually getting the right support out to advisers and planners and wealth managers and all those different strands. How does it fit into Consumer Duty? How does it take into account Net Zero?

So, you can sign up and you can keep an eye on it on the PIMFA website where all the information is hosted. But be aware that is coming your way, and please do chip in because we know, I've worked with advisers since I was 22, or something, I know this stuff isn't easy. So, we're going to do what we can to give you some kind of structure that would just call out those key points, things like most of the services that you receive at the moment from people who are analysing risk and the training you're receiving from industry associations simply do not understand climate risk. There are no good client outcomes in a hot house world where the economy goes over a cliff edge because we've failed to manage it. So, we want to try and up skill advisers to say, “yes, I understand what my client wants. I know what the problem is. Therefore, this is what I'm going to do about it” and make it bespoke for your own business. So, that's in hand.

19:40

Paul Richards: So, a necessary and important initiative. So, Matt, if I could bring you in now – thank you for waiting patiently to be involved in the conversation – I was going to ask you a question about active and, touching on the point Amy made earlier, passives, specifically. I think it's been a tough year for active fund management. The best-selling funds in the industry are undoubtedly passives, and what I mean by that is traditional passive investments, FTSE trackers, US index trackers, etc., and those, by definition, are packed with things like oil stocks and mining stocks, and that sort of thing. So, given these flows into traditional passive investments, where do they fit in with all this SDR labelling and all that sort of thing?

Matthew Jennings: Yes, thanks, Paul. Well, I suppose I should start with a caveat, which is that my background is in active investing. I'm going to try to give you a balanced answer, but I'm not promising anything, and I would invite the other panellists to add a bit more balance to what I'm saying. I completely agree with Amy that there is space for both active and passive solutions within the fund labelling categories that the SDR sets out. And then, to your point, when we think about trackers and passive investing is, most of the time, these big FTSE 100 trackers, S&P 500, these are not what the FCA has in mind when they're thinking about these labels, they're not going to be constructed in most cases with any reference at all to sustainability outcomes. And so, they're not appropriate for labels. So, what this really does for the passive investment industry is, it sets a challenge for innovation. There are some emerging solutions. So, in the policy paper, the FCA actually references Paris-aligned benchmarks. So, there are signs of development here, but overall, for mainstream, conventional passive funds, this is going to be out of scope.

I think the other point I'd make quickly on that challenge for the passive investment industry is around the idea of stewardship and engagement, which is given quite a bit of prominence within the SDR regulation. Certainly, at Fidelity, we really welcome that because we see this as a really core way of encouraging improvement in the companies that we invest in. In our experience, to drive successful engagement outcomes, you need good relationships with company management and certainly access to senior levels of company management. And you also need a really good and detailed understanding of the companies themselves and the industries that they're operating in, so that the outcomes and the milestones you can encourage them to target are realistic and consistent with our business models. So, that lends itself to active management more easily because it complements the fundamental research that active managers are doing on a day-to-day basis. It's not impossible that passive managers would be able to do that too, but they need to invest in a new set of skills, to be honest, in order to do that.

23:19

Paul Richards: And that's a good point. Does that actually happen in practice? So, if I'm a manager, if I run a FTSE 100 tracker, how am I able to exert any influence to change on the companies that form part of the tracker portfolio?

Matthew Jennings: So, I think different companies take different approaches to that, and some are more active than others. A lot of the big index providers have actually stepped back from taking a very clear position on sustainability issues recently. Some remain engaged and continue to, in the way that they vote, and in the way that they support shareholder resolutions, those are where you can find the clues as to a particular asset manager’s stance on these things. So, I think I want to be a little bit careful about generalising and encourage people to look at their investment partners and the specific approaches that they're taking.

24:28

Paul Richards: Right, let's move it on, and let's stick with the theme of passives. And you've touched on this already, Amy, that in the context of how new passive strategies are emerging which purport to meet the needs of advisers or clients who express sustainable preferences. There's a lot of pressure on cost in the market at the moment, every adviser I speak to, they’re talking about making the business more efficient and what they mean by that, in practice taking cost out of the business, taking the customer’s platform charge and the asset management charge. So, prices are being pushed down, and therefore I see a greater emphasis on passives more generally. So, do you think the passive industry is going to be able to adapt and provide the sort of solutions that fit within these SDR labels that we talked about earlier?

Amy Clarke: Yes, so this is a brilliant question and we could spend hours debating this. Just to go back on something that you just said, Paul, about the ESG outflows being a big proxy for what's happening in the marketplace. Can we just recognise that there were an awful lot of ESG tourists who visited ESG during the upturn because, like any good trader, the share prices and the returns were looking great. So, I'm going to jump on that bandwagon and what we've seen, I think, over the last year or so is a lot of those tourists deciding to go home again. So, there was always going to be, I think, an adjustment in the marketplace. So, I don't hold with the school of thought that somehow the ESG boom is dead. ESG has been around as a concept for 20, 30 years, even longer when you look back into some of the very early types of businesses that we had. So, the ESG boom, as such, does not herald – it's not a portent for this type of investing disappearing by any stretch of the imagination. What I think we've seen is the wheat and the chaff being sorted over the last 12 months. Very much so.

With regards to passives, I think what we're now seeing as well is these new next generation passives coming through that are more actively managed. So, picking up on a lot of what Matthew was saying, each house will do it slightly differently. But what we're now starting to see in the market with some of the big houses – but also some of the more niche new providers coming in – is this notion of stewarded and more actively-managed passive strategies coming in that enable the end investor, in some instances, to either pass through an expression of wish on voting. So, for example, “I want you to vote this way, my share. I have these many shares, and I want you to therefore vote my shares according to this type of voting policy”, if they're using voting policies. As much as we've got pass through voting as well where the asset manager is effectively saying, “well, you vote, I will give you the opportunity to vote.” There are issues associated with both of those depending on the level of expertise that the person who is being given the vote has, knowing how to vote, especially in the absence of any engagement. But this is almost like the first iteration, I think, of a much more interesting type of passive strategy that is straddling this bifurcation that we have in the market between passive and active – you'll be one or the other – well, why can't you be a bit of one and a bit of the other? Why can't you actually inhabit that space in between? And that's what we're now starting to see. And I think that is going to be very, very interesting over the next few years.

28:15

Paul Richards: Okay, just referencing Matt's point there about balance to this debate, and I don't want to take the stance of active versus passive particularly, but it strikes me that active is the way in which you can really get under the skin of a company, understand how the company works and influence how a company works. Can a passive manager do the same?

Amy Clarke:  If you take some of the large asset managers who will have dedicated stewardship teams, for example, who will be engaging in that company across multiple positions held in multiple funds and the aggregated position that they therefore have in that business through multiple funds is actually quite sizable. Yes, you can.

Julia Dreblow: They can switch index providers; they don't have to stick with the index. There're issues around what they've sold. But I just throw in there, they're emerging index providers doing some really interesting stuff. And they're choosing not to use them at present.

Amy Clarke: Yes, absolutely, Julia. So, I think there's the issue around careful which index you provide, but also recognise this next gem. But also, if you do steward and you have active stewardship, then make sure that you're doing it, but also then maybe aggregating those positions up so you have 50 fund managers who, for example, are all holding Company A, are you going to allow 50 fund managers to all vote differently? Or are you going to aggregate those votes up and say, “we're going to have a consistent vote with this company and as a result, our holding in this company is 1%, we suddenly have quite a bit of agency here to steward this company”. So yes, you can. But it's a very, very different type of execution that's required.

30:02

Paul Richards: Okay, thank you. Amy referenced that the outflows – I think one industry commentator described this is as “the great ESG backlash”, and I think you've touched on an answer to that, Amy, but there have been a number of articles around ESG challenging the receive wisdom that this is the way the markets going to go, and all the money is going to go into ESG. We talked about this before this call, the story in the Times this morning, Jim Radcliffe was saying, the guy who runs INEOS, of course, was saying that the carbon taxes are going to push businesses like him out of Europe and into what he described as more enlightened jurisdictions like America. Is that the case of getting too far with the legislation? Is it going to damage industry?

Amy Clarke: I think we have to look at the route direction of travel of regulation and policy worldwide. I think it's too easy to say the carbon border adjustment mechanism, the carbon tax, for example, as well, in the European Union, is going to unfairly penalise business. It's not just happening in Europe. So, as of the end of 2023, 92% of the world's GDP, that's 88% of the world's greenhouse gas emissions were covered by Net Zero policies at the sovereign level, so the national level. We've got, I think it's about 55%, it might be slightly more, about 55% of global GDP now covered by countries who have either got existing taxonomies, i.e., pre-qualification criteria for what sustainable solutions are. So, is gas, natural gas, is that a renewable energy or is it not? We've got 55% of the world's GDP, either with pre-existing taxonomies or with new taxonomies coming online. This isn't a European problem. This is a global move towards recognising the systemic and existential risks embedded, specifically if we take climate as an example, embedded in our very, very slow, so far, approach to tackling the risks.

32:25

Paul Richards: Lee, do you have a view on that one?

Lee Coates: Yes, I'll just back up what Amy said. But I also want to go back slightly on the outflow issue because there's a question in the chat about that. I am going to be reductive on this – great word, Amy – and look at it and say, okay, if there's a logic to clients saying, “I don't want ESG anymore, that's why I'm moving my money out”, the same logic – and this is where I'll get lots of backlash – the same logic is applied to any client if they're moving out of UK equity funds, “never put me back in a UK equity fund, the UK equity market is dead, I shouldn't have been in there in the first place. Oh, and also, if any other market performs badly, never put me back in that market”. Clients, 30 years of an IFA speaking here, clients who are in the right strategy – doesn’t matter about individual funds – clients in the right strategy, and understand that strategy, weather market downturns. Doesn't mean they don't panic, doesn't mean they don't phone you up and email and go, “my god, what's happened to my money? What do I do?” To which a normal response is, “it's a long-term strategy, you’ve got cash, you stay with it”. But clients that believe in that strategy.

So, the mass exodus from ESG, as probably Amy said – the ESG tourists – they weren't in ESG funds because they were ESG funds. They were in those funds because they were performing well at the time. So, again, coming back to my logic extension, if they were in ESG funds on performance and came out on performance, then either it's got nothing to do with ESG, or it's got everything to do with ESG, in which case the same applies. IFAs, basically, haven't got a future because clients will pull money out of the UK, they'll pull money out of America, they'll pull money out of Europe as soon as it performs badly, and they should never go back in. Well, we've got a circular planet, we're not creating new countries, new markets to go into. So, eventually, there'll be nowhere to invest. If you apply that logic.

Paul Richards: Slightly controversially, Lee, I'm going to ask you whether your answer implies that investors are actually more focused on returns than the desire to do good things for the planet?

Lee Coates: Yes, a lot of people will be. But also, it depends on what an individual client's definition of return is and how they've been educated by their adviser. So, if their benchmark is always, “am I performing as well as the best performing fund today and why aren't I in it?”, then advisers may as well pack up and go home now, because you always want to be in the thing I should have been in yesterday. You can't deal with that. If the benchmark is, “am I getting above inflation, above cash returns for the risk I'm taking?” then, “could I be better?” is rather nebulous. And, “why aren't I in the fund that was performing better today and why didn't you put me in it yesterday?” And no one wants to go there. So again, 30 years’ experience, clients who understand what they bought – and why they bought it – will stick with the strategy. IFAs might tweak the underlying funds, but clients don't buy individual funds, “well, I'm so excited about that blue one because I wanted a blue one, I've only got two greens” and I don't mean green, as in eco, I mean colour-coded, so no, it's a circular, semi vacuous argument really.

35:51

Amy Clarke: Can I add something to what Lee is saying because I think there's a really, really fun, if that's the right word, analogy here. Let's talk about diets, okay? So, Julia and I decide – not that we need to, Julia certainly doesn't need to – Julia and I decide that we want to go on a new diet. So, Julia chooses her diet according to her body type, her intolerances, and ultimately what it is that she is hoping to achieve over a certain period of time. And I go on my diet according to what I want to achieve, my intolerances, and what I want to achieve over a period of time, And, that is set for me as much as it is set for Julia. If I start comparing my progress against Julia's diet and Julia's progress, I'm not honouring what it was that I put in place that is right for me, and it's slightly fun and, again, it is slightly tongue-in-cheek analogy, but, as advisers, our responsibility is to sit down and help the client understand what it is that they want to achieve, what their intolerances are, and over what period of time. And if we start then encouraging them to benchmark themselves against other people, i.e., other indexes, funds, etc., we are not honouring what it is that we told them in the first place. And that's a really critical point, I think, in terms of helping people understand the strategy that is right for them.

37:28

Paul Richards: It's a brilliant analogy, and I'll tell you what we could get into a significant debate here about how advisers run money and the compatibility of how advisers run money currently with meeting individual client preferences. We haven’t really got time for that one, maybe that's for another day.

Can I just go back. I mentioned in my introduction the COP 28 which took place in Dubai towards the end of 2023. Let’s get back to what governments are trying to do to help make the planet a better place for us all to live in. The headlines were all about commitment to phasing out fossil fuels. So, what was behind those headlines? And do you think the promised reductions will actually happen?

Amy Clarke: Yes. So, first point, the final text and the headlines stopped short of committing us to phase out fossil fuels and introduced language around transitioning away, which is much more subject, shall we say, to abuse. There are a lot of loopholes within that, which is why there was a broad welcoming of the fact that at least we've got fossil fuels now in the final text, we've got it in that agreement. But that the language in and of itself was not as anchored in firm commitment as it should have been. Parking that, we had some big announcements coming out of COP 28, one was a tripling of renewable energy capacity by 2030, and then a doubling of energy efficiency and projects, but in the same period as well, and that's seismic in terms of the scale and the pace and the change that is going to be required to meet those commitments. We've also had other commitments, for example, around food and agriculture, and bringing the food system much more cleanly and much more concertedly into the heart of all of the climate, finance, policy, regulation and investment landscape that we work in.

So again, it comes back to the question in some ways, Paul, that you asked earlier around Jim Ratcliffe potentially moving INEOS out of Europe. There are very, very few places that you are going to be able to hide because these big commitments coming out of COP 28 and then coming out of big economic trading blocks like the EU, other big economic powerhouses like the US, the Inflation Reduction Act, like China, for example, is all geared towards an acceleration, an absolutely extraordinary acceleration in the deployment of the very solutions that we need to tackle the climate crisis and with that comes potentially a shift, quite possibly quite a seismic shift, in subsidies. So, at the moment, black energy – oil and gas – is subsidised at a rate that far outstrips green and clean technology. So, whether or not there will be a rebalancing of that weighting as well, that gets thrown into light, the regulation and policy landscape, and what's being developed, that gets thrown into light.

And as an investor, you need to know about these things because this is the route direction of travel for an environment that's going to be policy-friendly, consumer-friendly and hopefully, therefore, if you're a business, is going to help stimulate your growth. Oil and gas is not a growth sector, we know that. Green and clean, for example, is a growth sector, and all of the signals out in the marketplace that investors should be looking at – regulation, policy, consumer – everything is pointing in that direction, and, as an adviser, you want to be working with individuals who know how to navigate that landscape, because everything is moving and shifting very quickly.

41:28

Paul Richards: Okay, thank you. Matt, can I come to you? As Amy mentioned, in the US, the Inflation Reduction Act, and, as I understand it, that's all about investing into domestic energy production while promoting clean energy, and there's also the EU Net Zero industry acts. So, there's a received wisdom in the in the market, that a wall of money is going to flow to initiatives that will accelerate the drive to Net Zero and that, in turn, will provide some significant real investment opportunities. Is that right? Is that going to happen?

Matthew Jennings: Yes. So, I'm mindful of the time here as well. And that's a question that we could spend a long time discussing. I think I'll just give you a few quick observations. So, as you alluded to, the Inflation Reduction Act isn't really about reducing inflation, it's about supporting decarbonisation and it frees up a huge amount of government investment. So, the estimates put it between half a trillion and a trillion dollars. So, this is a serious amount of fiscal support for industries, such as renewable energy, hydrogen, electronic vehicles, that sort of thing. So, this created an initial bout of excitement in the market and with investors, which has since receded quite a bit. I think the reason for that comes down a lot to what's been going on in the broader economy in terms of interest rates, macro trends, that have made the environment for these sorts of industries more challenging because higher interest rates mean that the upfront investments that these companies need to do is more expensive to finance, which is part of the reason that we've seen ESG or sustainability as an investment theme fall out of favour a little bit in the last year.

But let me just finish by linking this back to Amy's great analogy, because I think the other thing about diets, as far as I understand them, is they only really work if you're committed to them over the long term, right, and sustainable investing is exactly the same. So, inherently, these themes are multi-year investment themes, they're not going to deliver out-performance every single year. But if you're investing for the next generation, certainly, that's where we can have more conviction that they will add value as investment strategies.

44:00

Paul Richards: Okay, that's a brilliant point which to draw it to a close, I think. It's 10:44, so in traditional style, I'm going to go for quick fire key takeaways for our advisers. What will this mean for them? So, one key point from each of you before we close it. Maybe I could start with you, Lee?

Lee Coates: Oh, okay, thank you for that, Paul, and I really thank you for that. Okay. Document. Prove that your clients don't want sustainability. Prove the FCA wrong. If it's a challenge, there you go – throwing down the gauntlet – prove the FCA’s figures are wrong. You'll only do that by asking every single client the right question in the right way at the right time and recording it and recording that data. And if you ever get a bit of desk-based monitoring – done!

Paul Richards: Julia?

Julia Dreblow: So, I would say, firstly, picking up on earlier comments, clients can hold two thoughts in their mind at once, right? They can want financial performance and good real-world outcomes. So, the adviser’s response to that – and I learned this new phrase yesterday that I love – beware reckless caution. So, reckless caution is where an adviser is saying, “I don't really understand this, so I'm going to stay away”. That is the enemy here. That is what is going to lead your clients to be in the wrong assets as things really start moving fast and they are starting to move, there's a lot going on, so beware reckless caution.

Lee Coates: Foreseeable harm.

Julia Dreblow: Foreseeable harm, yes indeed.

Paul Richards: Amy?

Amy Clarke: So, I'm going to rip off what Julia has just said and talk about having the conversation in the first place. There's a lot of fear in starting a conversation with a client about what they care about and what change they'd like to see in the world. And we all, at any one time, have a choice as to whether we give our fear a vote alongside that voice. This is a basic human conversation, person-to-person, human-to-human, it is a joy to have and we are all learning, all of us out there are learning a lot very, very quickly and moving this industry forward. So, there is more than enough support – moral, intellectual, physical – support out there for you if you want to start those conversations, but just start them because it's literally just your fear that is possibly holding you back from having that conversation in the first place.

Paul Richards: Okay, thank you. Matt, can I finish with you, please?

Matthew Jennings: Yes, I think this is a really important moment for the UK investment industry. It's an important step for us to take. I'm not sure to be honest if the impact of it is going to be obvious immediately, it might take some time to play out. So, again, I just return to this idea about long-term thinking. I think most end-investors are thinking about preserving and growing their wealth over, in some cases, multi-generational timeframes so sustainable investing is really helpful for investors that have that aim.

Paul Richards: Okay, fantastic. Look we've overrun by a couple of minutes. I apologise to you, to all our advisers for that but I felt it was worthwhile. I think it's been a really interesting and useful discussion, and I hope you found the same, and I hope it will help inform your conversations with your clients around what is a really complex issue. So, for those of you who attended today, we'll be sending a video recording of the session, please feel free to forward that to colleagues who weren't able to attend. We’ll also be sending a short feedback questionnaire, which I would be grateful if you could complete because your feedback is really valuable. So that's all that there is time for. Thank you so much for joining in, and see you all next time. Thanks very much. Goodbye.