Advisers warned to be more specific on ESG investments

Financial advisers and fund managers will need to become more specific and transparent about ESG investments in the face of a stricter approach by the regulators, according to research and ratings house, Zenith.

Zenith Investment Partners, head of responsible investment, Dugald Higgins said that advisers and fund managers would need to be more conscious of how certain funds are labelled and be more specific about ESG with their disclosure statements to clients.

According to Higgins, when compared to other parts of the world, Australia is less developed when it comes to ESG standards and this will need to change quickly as clients to continue to demand further transparency.

“Australia is one of the worst countries when it comes to the transparency of portfolio holdings. It’s understandable that full holdings disclosure is problematic if you’re an active fund manager, but it’s also something more clients are seeking,” Higgins said.

“The global shift on ESG standards is already happening, and Australia cannot afford to be left behind.

“For example, if you are an adviser in Europe, you must ascertain whether your client has sustainability preferences and, if they do, you must match products accordingly.

“If you’re a US adviser and you make ESG recommendations, you have to provide your clients with documentation on how you arrived at your recommendation and your methodology.

“While the UK is currently finalising new enhancements, their regulator is highlighting a future preference for advisers to address sustainability in the advice process, and to obtain their clients’ sustainability preferences to ensure product suitability.”

Because Australia is coming into an ESG disclosure regime a bit later than the rest of the world, Higgins says we have the opportunity to better navigate the regulatory space, based around a proposal by Treasury to mandate reporting frameworks built around the Task Force on Climate-related Financial Disclosures (TCFD) and the International Sustainability Standards Board (ISSB). He believes conversations are sufficiently progressed to highlight that it’s going to be a case of ‘when’ not ‘if’ this happens.

“While there are some differing industry views on minor details, none of the many submissions I’ve seen are saying we shouldn’t do it. It’s a pretty safe bet to say it’s happening, so you need to plan accordingly.”