Responsible investment and regulation

15 July 2021
Listen to Fiona Hanrahan and Ryan Medlock in our latest podcast as they discuss Responsible investment and the impact that regulation has had on this to date.

Fiona Hanrahan and Ryan Medlock from our Intermediary Development and technical team cover what primary regulatory drivers financial advisers should be aware of, why we should be aware of the EU’s reforms and take a look at the Sustainable Finance Action Plan.

FH: Hello. My name is Fiona Hanrahan, and I'm joined today by Ryan Medlock. Today, we're talking about responsible investment and regulation, and Ryan is going to answer my questions. So first of all, then, Ryan, what impact has regulation had on responsible investment to date?

RM: Well, the first thing to point out, Fiona, is that there's been an absolute raft of proposals, amendments, and new requirements, and to be honest, it's not about to let up anytime soon. What is also really obvious is that both regulators and policymakers are using responsible investment as a means to re-inject a long-term focus back into investment activity. And that's a really important point, in the context of the UK, and other countries achieving their net zero targets. And it’s going to be something we hear a lot more as we approach COP, 26 in Glasgow this November.

FH: OK, so what are the primary regulatory drivers that financial planners should be aware of right now then?

RM: Well, I’ll actually pinpoint a number of different drivers that the advice communities should at least be aware of. So, firstly, you've got the pension schemes bill amendment. That's important because it aligns the goals or pension schemes with the goals of Paris Agreement, and reflects this wider move of the industry, proactively trying to tackle the climate crisis. In addition to that, there's new requirements in place for the trustees of occupational pension schemes from a reporting and disclosure perspective. And I'd also a flag that independent governance committees or IGCs, have had their oversight broadened to cover their provider's ESG policies. I think the most influential driver, I think financial planners should take note of are all the various reforms which are imposed and implemented within the European Union.

FH: But we're not in the EU anymore. So why should we pay attention to their reforms?

RM: Well, it's purely a direction of treble thing. Now, the EU has set a very ambitious Sustainable Finance Action plan, and we know the UK. Government wants to at least mirror what the EU adopts in this area. So, I see these reforms as basically, a benchmark of where we're heading.

FH: So, tell us about this Sustainable Finance Action Plan then

RM: OK, so there's a number of recommendations within this plan. The first recommendation is the creation of a taxonomy, which is a framework to help investors determine which financial products are green. And it's basically based on a number or meeting a number of environmental objectives. You've also got the Sustainable Finance disclosure regulations, or SFDO a short. That is all about better informing investors of sustainability risk and improving disclosures, and the UK has already announced that its adopting its own taxonomy and its own variation of SFDR. And obviously we eagerly await the clarity on that. But back to the EU, there are some amendments to a number of delegated acts, that I think financial planners should pay very close attention to.

FH: Ah. So, is this the MiFID II two amendments you're talking about?

RM: That's right Fiona, absolutely. So, this amendment to Article 25 of MiFID II, I think this is the big one as far as the financial planning community is concerned because what it's doing is, it's injecting sustainability, right into the heart of the advice process.

FH: And how exactly does it do that?

RM: Well, Article 25 of MiFID II relates to the suitability assessment. The proposal states advice firms should take into account their clients' sustainability preferences within that assessment. Now, obviously, we're still waiting for clarity as to what measures the UK will be adopting along these lines, but for me, the ambition of the UK is very, very clear in this area. It wants to at least match what the EU is doing. And I think it's fair to say that at some point, in the not too distant future, this will actually change the way that some advice firms conduct their business, and assessing clients sustainability preferences will become a mandated and core component of financial planning.

FH: Thank you so much Ryan

RM: Your Welcome, Fiona

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