For clients who indicate ESG is not important to them either way, “it would be better for the adviser to include a statement in their suitability letter that, while the client said they 'weren't bothered' about ESG, the adviser will include funds that use ESG as a risk mitigation tool in the investment process, to enhance the overall risk management of the fund,” says Coates.
“Ultimately, it is better to get firmer wording from the client to keep on file, rather than recording 'not bothered' and to include clarification of what definition of ESG the client 'isn't bothered' about,” he adds.
Advisers should also consider the timing of raising the ESG subject, notes Coates.
MacDonald says he would approach sustainable investing during the fact-finding process for new clients and at annual review for existing clients. “For me it’s as much an intrinsic part of knowing a client as eliciting their attitude to investment risk and financial goals,” he says.
Head also says he would raise it as part of fact-finding. “That is the process where the adviser is learning about their new client, and understanding their moral, religious, social and environmental beliefs is central to knowing them as people and as clients."
But Coates cautions against raising the ESG question in the fact-finding process per se: “There is no natural flow from what’s the name of their dog to ‘do you want ESG’. It’s not a fact-finding question, it’s a soft question. It’s also a question that is based on an understanding from the client,” he says.
He says advisers need to ensure the client is in a position in which they can make an informed decision. If they are asked outright about ESG, and they do not know the subject very well, they may be inclined to say no.
Instead, advisers should ensure the client has some knowledge about ESG before they start asking them to make a decision about it.
Coates points to a fact sheet published by the FCA, fact sheet number 21 for investment advisers, which, he says, shows the need to ask these questions in addition to fact-finding, not during fact-finding.
The paper is a guide to fact-finding in which the regulator stipulates the benefits of gathering additional information in the form of soft questions.
“Sometimes a core fact-find may not be enough. Gather more of the customer’s views and feelings, to help assess their needs and produce more effective suitability letters,” the regulator states.
