ESG and the 5 T’s

Under the increasing pressure and the growing popularity in ESG-related discussion, the FCA released its ESG strategy on 3rd November 2021 in the form of a Discussion Paper, designed to coincide with the COP26 climate conference in Glasgow. The discussion paper focuses on sustainability disclosure requirements, and explains how the Regulator will set standards for firms working within the financial sector, inclusive of advisers, building on existing measures.

Due to the increase in popularity and awareness of Environmental, Social and Governance (ESG) investment, the Regulator has acknowledged the need to put in place the proper infrastructure in order to maintain oversight, as well as to support the financial sector in driving positive change. The strategy is included in the FCA’s Business Plan 2021/22 and sets a structure to deliver on target-ESG related outcomes, focusing on five core themes;

  • Transparency.
  • Trust.
  • Tools.
  • Transition.
  • Team.

The FCA intend on working with the advice industry, listed companies and international partners in order to make a more sustainable economy as well as build trust and integrity in the market for ESG products.

Following Brexit, the UK Government decided against opting into EU regulation on ESG, yet the FCA has recognised that without a framework and ‘without common standards, clear terminology and accessible product classification and labelling, there is a risk that consumers will find it difficult to navigate the landscape of products and assess suitability.’ The new Sustainable Disclosure Requirement will be aligned with recommendations from the Taskforce on Climate-related Financial Disclosures (TCFD) and will be monitored closely by the new Disclosure and Labels Advisory Group (DLAG), comprised of stakeholders, industry experts and consumer representatives which will meet frequently to provide feedback and advice on the SDR.

Although the discussion paper is mostly relevant to firms involved in investment management, the FCA recognises the significant role that advisers play and states that they ‘should consider sustainability matters in their investment advice and ensure their advice is suitable and reflects the consumer’s sustainability-related needs and preferences’.

If we remove the ESG from the former sentence… ensuring your advice is ‘suitable’ and ‘reflects your client’s needs and preferences’ is exactly what advisers should be doing anyway, now you just need to ensure it is applied specifically to ESG desires.

The paper represents good steps from the Regulator, but it is nothing revolutionary in its concepts, as we have found from discussions with our firms. Through fact-finding, you glean your client’s preferences, desires and objectives so that you can go away and find your client the most suitable product to fit those needs. You can’t fit a square peg through a round hole. And ESG requires the same school of thought- it’s just new speak. You can’t base the client’s environmental, social or governance preferences off hard facts – the difference here is how you develop question understanding, and now we have been given a framework from the FCA to work towards. ESG has been around for a while and it is likely here to stay in some format. It’s good to see the Regulator keeping in time with the sector.

The paper seeks feedback on areas such as sustainable investment labels and welcomes responses from the wider public, whether you’re a regulated firm, an individual consumer, or an industry expert. The deadline for responses is the 7th of January 2022.

Megan Wicks – Graduate Trainee Compliance Support