Considering a client’s values and ethical concerns in financial advice might become the new norm, according to current regulatory changes, consumer demand and global trends.

Which way for financial advice?

There are three important drivers of change currently taking place in financial advice, that is triggering discussion among advisers, clients and investors. First, Financial Adviser Standards and Ethics Authority (FASEA) have introduced legislation from 1 January 2020 that has financial advisers asking whether they need to incorporate ethical and responsible investments into their recommendations. Second, people are both demanding and expecting that their investments and superannuation are invested responsibly. Third, there is a global push toward sustainable finance whereby capital is mobilised to create economic resilience as well as social and environmental sustainability.

FASEA Code of Ethics

FASEA have introduced a Code of Ethics for financial advisers that extends current obligations by providing advisers with guidelines for ethical conduct that centres on the client’s best interests duty. In an explanatory note, FASEA writes “where your clients indicate they only wish to invest in ethical or responsible investments, you will need to consider whether limiting your product recommendations in this manner is appropriate”. This has sparked debate around whether financial advisers should be proactively asking clients about their ethical concerns.

In an explanatory guide released by the Financial Planning Association of Australia (FPA), there is an entire section dedicated to ethical or responsible investments.

The following highlights are taken from this booklet and relate to best interest obligations and ethical or responsible investments:

  • Advisers may need to consider whether product recommendations should be ethical or responsible (pg. 12).
  • Are there any environmental, social or ethical considerations that are important to a client (pg. 18)?
  • Relevant circumstances may include a client’s preferences around ethical or socially responsible investments (pg. 27).
  • Advisers need to consider whether product recommendations should be limited to ethical or responsible investments (pg. 29-30).
  • Advisers must clearly document how they determine whether ethical or responsible investment options meet a client’s broader long-term goals (pg. 31-32).

It should be noted that the guidelines from the FPA are only a guide and interpretation of what has been legislated in the FASEA Code of Ethics. The Code of Ethics was not designed to provide step-by-step instructions, rather to provide overall standards that will enhance values, ethics and professionalism in the financial planning industry.

Currently in Australia, it may not be a legal requirement to proactively determine the sustainability preferences of a client. Globally, however, there is a move toward the obligation for advisers to expressly seek out the sustainability preferences of their clients, suggesting that this may become the ‘new norm of knowing your client’.

Consumer demand

Recently there was an article written by Bloomberg about BlackRock called BlackRock Has Green Plans. Larry Fink is the founder and CEO of BlackRock and he announced that his firm will make investment decisions with environmental sustainability as a core goal. He says that BlackRock will begin to exit certain investments that “present a high sustainability-related risk,” such as those in coal producers.

Now, BlackRock is the largest asset manager in the world, with nearly US$7 trillion under management. This move will fundamentally shift its investing policy — and could actually pressure other large money managers to follow suit. Blackrock have also signed up to Climate Action 100+, a group of investors managing assets worth more than US$35 trillion that pressures fossil fuel producers and other companies to reduce carbon dioxide pollution.

It is worth noting that Fink frames the emphasis on sustainability as client demand: “Over the past few years, more and more of our clients have focused on the impact of sustainability on their portfolios,” he says, “Climate change is almost invariably the top issue that clients around the world raise with BlackRock.”

Consumer demand for ethical investments is on the rise. In a report by the Responsible Investment Association of Australasia (RIAA), charting consumer attitudes and demand for responsible investing in Australia, 9 in 10 Australians expect their superannuation or other investments to be invested responsibly and ethically.

Millennials are the most likely group to prefer to invest in a responsible super fund than a fund that only considers maximising financial returns (75%). Not only that, but 88% of millennials surveyed would consider investing in ethical companies, funds or superannuation funds in the future or are already doing so.

Sustainable Financial Advice

Sustainable finance is necessary

Sustainable finance generally refers to the process of taking into account environmental and social considerations when making investment decisions, leading to increased investment in longer-term and sustainable activities.

Back in 2015, most governments across the world agreed that we need to meet the Sustainable Development Goals; 17 globally accepted goals made up of 169 targets to create a sustainable planet by 2030. The goals include no poverty, enough food, health and well-being for all, clean water and energy, peace and justice. It is estimated that we need US$5-7 trillion of investment each year to achieve them. Although the goals are gaining traction, the financing gap at the end of 2019 was US$2.5 trillion/yr. Poverty is falling too slowly, global hunger is on the rise, we’re losing biodiversity rapidly, greenhouse gases are still increasing and we are now faced with the possibility of global temperatures rising to 3 or even 5 degrees Celsius.

A number of initiatives have been developed to enable the finance industry to mobilise capital toward sustainability and effectively close this financing gap. The Action Plan on sustainable finance adopted by the European Commission in March 2018 has 3 main objectives:

  • Reorient capital flows towards sustainable investment, in order to achieve sustainable and inclusive growth.
  • Manage financial risks stemming from climate change, environmental degradation and social issues.
  • Foster transparency and long-termism in financial and economic activity.

In this ten-point guide for the European Union (EU), action four proposes that sustainability preferences are taken into account when providing financial advice.

In 2019, the University of Technology Sydney (UTS) conducted analysis that compared the EU and Australian transition to sustainable finance. Their research report states:

“The financial system lies at the heart of the economy and is therefore integral to reducing short-term systemic risks and enabling the long-term sustainability. Sustainable finance refers to any form of financial service, including investment, insurance, banking, accounting, trading and financial advice, that integrates environmental, social and governance (ESG) considerations into financial decision-making. Sustainable finance is often understood both as ‘doing good and doing well’.”

A financial system that focuses on sustainable finance will ultimately enhance the resilience and global competitiveness of the financial sector in Australia. In their recommendations toward different stakeholders in the finance system, UTS specifically mention sustainability in investment advice and that the progressive interpretation of existing law increasingly suggests sustainability preferences should be sought and considered.

In March 2019, the Australian Sustainable Finance Initiative (ASFI) was launched to develop a sustainable finance roadmap, in consultation with diverse sectors and stakeholders. It is a collaboration that brings together leaders from Australia’s major banks, superannuation funds, insurance companies, financial sector peak bodies and academia. The roadmap, to be launched in 2020, will recommend pathways, policies and frameworks to enable the financial services sector to contribute more systematically to the transition to a more resilient, sustainable and prosperous economy, society and environment, consistent with global goals such as the UN Sustainable Development Goals and the Paris Agreement on climate change.

In a recent progress report, ASFI have highlighted the complexity and system-wide challenges required to achieve this goal and acknowledge the importance of the financial services sector. They state that a core purpose of the financial system is to allocate capital to productive purposes for the benefit of all. It will be interesting to see what this report determines regarding the future of financial advice.

Despite debate surrounding how much an adviser needs to discuss with their client regarding ethical considerations, it is clear that this area of advice is a growing interest. Regulation, consumer demand and global trends are driving an increase in ethics and ESG considerations within investments.

Advisers like Paul Garner already see the importance of incorporating values and sustainability in financial advice. In fact, Paul specialises in ethical and responsible investments and naturally asks clients about their ethical, environmental and social concerns. Paul has been supporting responsible investing for many years and believes that ethical advice makes good advice.

Want to know more?

Speak to me about how responsible funds may work in conjunction with your overall financial plan.

IMPORANT; This information is general in nature only it does not take into account your individual circumstances. We recommend that you seek professional advice before making any investment decision.

Please call 08 8363 8810 or email to discuss.

All the best

Paul Garner CFP®

Certified Responsible Investment Financial Adviser

This article was written in collaboration with Paul Garner of Novo Wealth and Alexandra Brown of Invest with Ethics