Supporting adviser businesses in the ESG transition

Square Mile's Diane Earnshaw looks at the year ahead for financial advisers from an ESG perspective

2021 was an extraordinary year for responsible investment. Looking back over the last 12 months, we have seen continued impetus in this space, both in terms of increased awareness and demand from investors, and also the number of market developments. As we enter a new year, we take a look back on the past 12 months and offer our thoughts on what advisers may need to consider in this coming year when it comes to responsible investment.

Responsible investment has been everywhere during 2021, with events such as the long-awaited COP26 conference and the release of UK government’s greening finance roadmap only further accelerating the movement and reaffirming the narrative around the importance of investing in this way. We expect to see this increased investor awareness continue over the coming years, as there is a greater understanding that responsible investment is one of the most effective ways to effect change.

According to a Make My Money Matter campaign, investing your pension responsibly is 21 times more effective than going vegan, flying again and switching your energy provider on your carbon footprint.  This greater awareness is supported by the burgeoning fund flows, with investors pouring over £1bn into responsible investment funds in October alone, according to the Investment Association, and we expect this trend to continue into 2022.

Whilst this increased awareness is ultimately a positive step forward, greenwashing still remains an area of concern for many investors. At our recent Responsible Pathway event, held in collaboration with ESG Clarity, Research in Finance shared their latest research which showed that 44% of investors surveyed cited a lack of trust that investments are as ‘green’ as they say they are as one of the biggest barriers to investing in this way. Whilst we continue to see great strides from the industry as a whole of tackling this, and creating greater transparency, this will be an ongoing focus over the coming months, particularly since the release of the UK government’s roadmap to greening the UK financial system, which was issued in October 2021.

The report, which details the first out of three phases, focuses on improving the flow of sustainability information from businesses to market participants, as well as encouraging the asset management community to deploy capital in a more responsible way. The three main elements outlined in the document are the Sustainable Disclosure Requirements (SDR), UK Green Taxonomy and Stewardship. The coming months will see a raft of consultation papers on the regulations and requirements outlined in the roadmap, however, for now, it provides a renewed momentum behind responsible investment that should re-engage market participants.

Financial advisers

Though much of the report centres on the role of companies, it does state that HM Treasury and the FCA are exploring how sustainability-related requirements for financial advisers can be introduced, and how sustainability is considered in the investment advice and suitability process. Whilst this is subject to further consideration, it confirms the direction of travel and suggests that the identification of a client’s sustainability requirements will form a more pronounced feature in the suitability process. We hope to see greater clarity on what this looks like in practice for the advice community in the coming months.

While we await the finer details from the regulator, we expect to see a growing number of advice firms evolve their responsible investment propositions and offerings in preparation for the upcoming legislation. This will differ depending on individual firms, however the focus should be on small, practical steps on their responsible investment journeys. These can range from education on investing this way, and the associated language and terminology, or how, as a firm, you think about and define responsible investment to determining how to capture client sustainability preferences at the fact find stage. We are aware that this is an evolution for many adviser businesses, and it is the role of the industry, as a whole, to support the advice community in this transition.

This year we have seen great strides in the world of responsible investment, and the renewed momentum we are currently experiencing will only continue to intensify over the coming months and years. As investors increasing realise their power in influencing change for the world at large, and greater clarity on the regulatory landscape, it is with optimism that we enter 2022 and look forward to what the new year will bring for responsible investment.


Natalie Kenway

Natalie is editor in chief at MA Financial covering ESG Clarity, Portfolio Adviser and International Adviser. She was previously global head of ESG insight for ESG Clarity and has been an investment journalist...