Financial advisers should tell clients about 1.5 degree pathway investments

Questions over Mifid II and SDR remain but Morningstar IM's Bragazza says advisers have 'responsibility' to clients

Financial advisers have a responsibility to educate clients about ESG and sustainable investing, a Morningstar Investment Management portfolio manager has said.

Speaking at a COP28 roundtable organised by the firm, Nicolo Bragazza said: “Financial advisers should help end clients know what ESG, action, sustainable impact is…they are responsible for the general public to understand these terms.”

This comes in response to data revealed by Morningstar’s global director of sustainability research and ESG Clarity Committee member, Hortense Bioy, that “87% of companies are on the pathway towards a global temperature rise of 2.1 degrees Celsius.”

Bioy continued: “It can be tempting to ask whether it is time to stop pretending we can limit the increase to 1.5 degrees Celsius. But shifting the goalpost could cause the private sector to delay necessary investments to decarbonise their businesses faster.”

There is a general mood that the world is “losing the race” to meet the goals set out in the Paris Agreement. Introduced in 2015, its 195 signatories are legally bound to hold “the increase in the global average temperature to below 2 degrees Celsius above pre-industrial levels” and pursue efforts “to limit the temperature increase to 1.5 degrees Celsius”.

However, Bragazza is hopeful that financial advisers will play their part and inform end investors about the ‘necessary investments’ required to maintain the 1.5 degree pathway at COP28.

Understanding Mifid II and SDR

Appetite from advised clients for sustainable investments appears to be growing. A recent Stonehage Fleming report found that the percentage of its clients who invest in ESG or socially responsible investment products has more than tripled from 14% in 2018 to 45% in 2023.

Under the Mifid II directive that came into effect in August this year advisers in the EU are required to consider clients’ sustainability preferences when conducting sustainability assessments. If a client expresses interest in making sustainable investments, advisers must accommodate this request.

However, an Oxford Risk report in September found just two out of five (38%) European wealth managers understand what the directives on sustainability assessments are in Mifid II.

Similarly, while upcoming Sustainability Disclosure Requirements from the Financial Conduct Authority should help provide clarity on sustainable investment products in the UK, according to EQ Investors’ joint-CEO and ESG Clarity EU Committee member Sophie Kennedy, there is still no prescriptive guidance or regulation (outside COB) that dictates best practice for integrating sustainability preferences into financial advice, for example, in respect to collecting information, like ‘know your clients’ requirements”.

For Overstory Finance director and ESG Clarity EU Committee member Rebecca Kowalski, communicating sustainability preferences with clients is key. She said: “In an ideal world, we need advisers to be able to relate the benefits of sustainable investment to clients with the same competence and confidence they display when reeling off the benefits of saving into a pension.”