ESG considerations and financial advice – EU regulatory changes

28 April 2020
In the first article of this three part series, Ryan Medlock reviews the regulatory changes on ESG which will impact advisers and drive responsible investment further into the mainstream.

There are regulatory changes afoot in the world of responsible investment, which are going to have a fundamental impact on the advice process.

Since 2018, there have been over 170 ESG (environmental, social and governance) related regulatory measures proposed globally - that’s more than the previous six years combined.

In 2018, the European Union also published a recommendation to make ESG investing easier across Europe, and as a result we’re about to see a raft of new regulations integrated into various directives which will drive ESG considerations further into the mainstream. This all goes to highlight the scale of regulatory focus in this area.

Talking to your clients about ESG

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What’s going to change?

Sustainability risk (the risk of fluctuation in the value of an investment due to ESG factors) is going to be integrated into MiFID II (Markets in Financial Instruments Directive), AIFMD (Alternative Investment Fund Managers Directive) and UCITS (Undertakings for the Collective Investment in Transferable Securities). The amendments to AIFMD and UCITS largely focus around improving disclosure requirements from asset owners and asset managers, but it’s the proposed amendments to MiFID II which will have the biggest impact on advisers.

The European Securities & Markets Authority (ESMA) is proposing that firms take into account ESG considerations when complying with their existing organisational requirements (this covers firms’ processes, systems and controls, their risk management functions, and the processes to eliminate conflicts of interest).

Firms will need to take into account their clients’ ESG preferences in assessing their investment objectives

In addition, ESMA has also proposed changes to the suitability assessment. Firms will need to take into account their clients’ ESG preferences in assessing their investment objectives, and will need to consider ESG factors in the context of product classification too.

What this means for you

The final rules and guidance are expected to be published later this year, and will potentially come into force as early as the end of 2020. Remember that this is an amendment to MiFID II, not a brand new EU directive. In addition, the FCA has indicated that they will seek to mirror the European initiatives in this area by implementing the rules and making the required changes to COBS.

ESG preferences aren’t suddenly going to take precedence over other suitability criteria but it’s another layer that will need taking into consideration. It’s therefore worthwhile to take some steps now and consider how to embed ESG preferences within your client fact finds and annual reviews. This could put you one step ahead of the field.

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About the author

Ryan Medlock

Senior Investment Development Manager

Ryan’s journey with Royal London began back in 2008 after starting his career in compliance with Norwich Union. As an Investment Proposition Manager, Ryan contributed to the growth and development of Royal London’s Governed Range before moving to Aberdeen Standard Investments for a stint in the Strategic Client’s relationship team. Ryan returned to Royal London in 2018 with a focus on exploring adviser angles amongst complex regulation and investment themes. Ryan is responsible for engagement with the advice community and investment industry initiatives, presenting, writing articles and commenting for the press and holds the CFA Diploma in Investment Management (ESG). Ryan is particularly proud of the fact that he finished 952nd in the 2008/09 edition of Fantasy Premier League.

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