In 2018, the European Union (EU) was introducing regulation to make environmental, social and governance (ESG) requirements an integral part of the financial advice process.
The UK, which was about to leave its European partners, promised its regulation would be at least as exacting as any offering from the continent.
Understandably, many advisers based in the UK decided to wait and see what new regulations might emerge before changing their approach to sustainability. After all, why act sooner and risk subsequently having to change course?
‘Sitting on hands’ no longer seems a credible course of action for advisers, given clients are seeking help today
Suffice it to say, progress over the past five years has been nothing short of pedestrian in both the EU and UK.
The EU, for its part, established guidelines for advisers on good practice in the area of sustainability in 2018, before introducing secondary legislation under Mifid II to expand existing requirements for advisers to include sustainability factors.
That legislation came into force in 2022. However, the requirements on advisers still revolve around having high quality conversations with clients that may range beyond conventional ESG topics.
Here in the UK, the Financial Conduct Authority decided against following the EU example of developing a ‘taxonomy’ of what green looks like, saying: “We are not…being prescriptive at this stage as to what the standard should be… We will consider updating our requirements over time as appropriate.”
Whatever the outcome of the FCA regulations, or the EU regulations that inspired them, it is clear they will not be completed before the end of 2025
Instead, the FCA has consulted on a more flexible approach, dividing funds into four sustainable categories and it intends to introduce a general ‘anti-greenwashing’ rule, reiterating requirements of all regulated firms that sustainability-related claims must be clear, fair and not misleading.
Progress, yes, but the next stage of the FCA’s policy process has been delayed until the fourth quarter of 2023. So, what does this all mean for advisers?
Well, whatever the outcome of the FCA regulations, or the EU regulations that inspired them, it is clear they will not be completed before the end of 2025, and they will still leave many decisions to clients when they are in place.
As a result, ‘sitting on hands’ no longer seems a credible course of action for advisers, given clients are seeking help today.
The FCA decided against following the EU example of developing a ‘taxonomy’ of what green looks like
So, it makes sense for professionals to take matters into their own hands and develop a strong approach to sustainability sooner rather than later.
We have established a new Sustainable Financial Advice panel to help advisers embed sustainability into the advice they provide. It benefits from having an observer from the FCA in place, alongside advisers, policy professionals and sustainable finance experts, and will help to ensure the profession is at the heart of policy developments in this space, whether they come in 2025 or beyond.
Matthew Connell is director of policy and public affairs at the Personal Finance Society
