HM Treasury released its policy paper - Greening Finance: RoadMap to Sustainable Investing - in October, intending to fix some of the problems that are hindering the UK’s ambition to be a green finance world leader.  

    The first priority is the lack of information, or the misinformation that is flowing along the supply chain from investee company, via investment funds, to the end client.   

    Sustainability

    A small part of the RoadMap refers to the role of financial advisers: 

    “HM Treasury and the FCA are exploring how best to introduce sustainability-related requirements for financial advisers. A key aim will be to ensure that they take sustainability matters into account in their investment advice and understand investors’ sustainability preferences to ensure suitability of advice.” 

    We don’t know exactly when this requirement will become official, but advisers would do well to start discussing this topic with clients without delay.   

    Ready, steady, go 

    The urgency of the need for climate action means the word 'race' is used frequently when discussing the transition to a low carbon economy. The government sees our industry as a vital member of the 'race to net zero' relay team. Speed is certainly needed, but a certain amount of preparation is essential before we line up at the start.   

    There are three main steps that advisers need to take to build a sustainable investment proposition: 

    1. Learn the basics

    Understand the difference between ethical, sustainable, responsible, ESG and impact investing and what they do and don’t do.   

    2. Decide how to position your SIP (sustainable investment proposition) 

    Will your core offering be ESG, sustainable or something else? Do you need a range of options? How can you best position the SIP with your firm’s existing business model and philosophy? How will you manage clients whose needs don’t fit the SIP? 

    3. Speak to clients

    Ascertain their values and views on environmental and social issues. Explore their level of ambition and the importance they place on values, compared to financial considerations such as risk, returns and charges.  

    From my recent conversations with advisers and paraplanners, it seems they are mainly stuck on step 2 - selecting the SIP.  It's great that we are thinking carefully about this, but we might find that applying more time to step 1 and 3 will allow step 2 to become clearer.  

    Environmental, Social, (Product) Governance 

    We need to consider another piece of regulation here – PROD, or the Product Intervention and Governance Sourcebook. This stipulates that products must meet the needs of one or more identifiable target markets and deliver 'appropriate client outcomes'. To comply with PROD and create a workable advice framework, we need to 'segment' our clients into broad sub-groups with common characteristics and needs. Our core services and solutions should meet the needs of these segments, with the occasional exception. 

    The same approach should apply to sustainable investing, but how can we segment our clients until we know what their sustainable investment preferences are? Unlike age, amount of wealth, level of knowledge and the other factors that decide the products we recommend, many advisers will not yet have details of their clients’ views on sustainability. 

    This suggests that the three steps to suitable sustainable investing should be taken in the following order: 

    sustainable

    This raises a number of questions. Adviser education is easy enough. There are lots of great sources of information, although they aren’t always consistent and we can be sure that the pace of progress in this sector means that knowledge dates quite quickly.  

    Exploring your clients’ sustainable investment preferences may seem daunting, but there are tools and process that can be put in place to help you. In order to help with the PROD client segmentation process, gathering client information in two stages is worth considering. 

    Stage one involves assessing which broad category of sustainable investor your client falls into (I believe there are typically four main categories). One category is likely to need a specialist solution, but the other three can probably be covered by a single or two-pronged SIP.   

    Stage one information can be used to:

    • Inform your sustainable segmentation for PROD 
    • Guide your conversations with the client about sustainable investment solutions (stage 2) 
    • Indicate whether you need to explore any specifc issues they are concerned about further (stage 2) 

    To avoid bias, free up meeting time and provide you with brilliant pre-meeting intel, I think that gathering stage one information should be done remotely, without advisor involvement via a method that is easy to use and engaging.  

    A perfect first step to your SIP

    Overstory Finance is currently developing a tool to help with this process and can also assist with your sustainable investment learning, client meeting content, shaping your SIP and integrating it into your processes. For more information, email hello@overstory.finance

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