‘If advisers aren’t taking this seriously, they are in breach of the FCA rules’

With the Sustainability Disclosure Requirements (SDR) coming into force, Isabel Baxter explores if the industry is open to making sustainable financial planning the default

The Financial Conduct Authority (FCA) revealed it will publish its policy paper on the implementation of the SDR for portfolio managers in Q2 2025. Names and marketing rules were set to come into force on 2 December, though some firms will now have until 5 April to comply.

Although the regulator is attempting to hone in the importance of embedding a sustainable focus, Downing Fund Managers found that nearly half of advisers believe the ongoing development of artificial intelligence will have the greatest impact on their businesses over the next five years compared to areas like ESG and regulation.

So, is the advice industry going to implement a more sustainable focus?

Switchfoot Wealth director Sebastian Elwell says that financial advisers “don’t actually have a choice” but to make sustainable financial planning the default.

He believes that sustainable financial planning could be a positive social tipping point that creates cascading change across the finance system.

“It starts with public awareness as the trigger for the system map – who better to deliver that than financial advisers?”

For Elwell, sustainable financial planning is not the same as recommending sustainable investments.

“We are not trying to fit sustainable investment recommendations into an advice/sales process that was invented to flog product,” he explains. “We have created a new methodology for the advice process itself – one of the outputs of which might be investment recommendations.”

Sustainable finance champion Rebecca Kowalski says that as a profession, advisers need to ensure they are allowing clients to make a more informed choice.

“It should become a default responsibility for financial advisers to have to educate clients about how sustainability affects all their financial decisions, investment choices and life plans.

“The adviser should then discuss all the ways they can help the client navigate the risks and changes ahead, personally, financially and even psychologically.”

Kowalski argues that she has seen “little progress” across the board when it comes to SDR.

“SDR is slowly making a little bit of change at the investment manager level but at the moment I see it mainly as enabling the most focused and dedicated sustainable and impact fund managers to promote their wares via the labels. Obviously, that’s a good thing, we want these funds to get greater market share, but we need to involve the whole market, industry, profession and public.”

Consumer Duty and avoiding foreseeable harm

Elwell cites that Consumer Duty includes the requirement to avoid foreseeable harms and believes that the regulation requires advisers to address systemic climate and nature risk.

“Harm from climate breakdown (and its investment consequences) are not only foreseeable, but entirely foreseen,” he says. “Consumer duty also has an expected outcome of informed choice.  If we use assumptions about the future in our advice that are demonstrably wrong due to ignoring the effect of climate breakdown then we are not putting our clients in a position of informed choice.”

Elwell stresses that sustainable financial planning is “no longer optional”.

“The FCA will however look to the SDR regime as its mechanism for understanding that people have been put in a position of informed choice,” he says. “Clients will need to know about the five options and make a positive choice towards their preference.  I don’t see that advisers have a choice to ignore it any longer.”

Under existing FCA rules, advisers have been urged to have discussions with all their clients as to whether they are interested in investing some or all their portfolio responsibly.

“Advisers should be asking these questions as part of their suitability process,” Square Mile strategic relationships director Jock Glover says. “Some clients will have no interest in their portfolios but the majority think that at least some of their portfolio ought to be involved in responsible investing.”

Glover cited the 2022 FCA Financial Lives Survey, which showed that 81.7% out of 19,145 UK citizens said they want their money to do good while making a profit.

“If advisers aren’t taking this seriously, they are in breach of the FCA rules and aren’t servicing their client’s needs,” he warns.

“When looking at the demographics of those surveyed there was little difference between ages and gender. The only meaningful determinate of interest in responsible investments in this survey are educational attainment and financial literacy.

“People who are more likely to invest in responsible investments are on average 7% more likely to hold shares and on average have 77% more money invested in financial assets than people who are not interested.

“In other words, the people who have the money want to invest in responsible investments, even at a time of financial difficulties.”

ESG suitability importance remains low in MPS

Despite the increased regulatory focus on ESG, other factors have been seen to come above it in terms of importance.

In its 2024 survey findings, fund ratings agency RSMR found that when it comes to managed portfolio services, the most often selected key features are performance, charges and availability on platform (s), whilst the availability of an ESG sustainability range is at 32% and ESG suitability is at 18%.

In other research, only 22% of advisers rate their knowledge of ESG as good or excellent, the annual ESG Attitudes Tracker from the Association of Investment Companies found.

It also found that only 13% of advisers feel that ESG investing is more likely to improve performance; 52% think that it is more likely to hinder performance; while 26% think it will have no impact

AIC research director Nick Britton cited that for the nearly 90% of advice firms that are now offering an ESG investment proposition, most cases it is an optional extra for clients who want it. Only a fifth of firms said ESG investing is an embedded part of their philosophy and process.

He says: “Although investors’ enthusiasm for ESG investing has waned since 2021, about one in ten clients will still raise the issue proactively with their adviser, and advisers expect demand to increase. Regulation also requires advisers to take clients’ ESG preferences and values into account.

“That combination of client demand, however modest, and regulation means that it will be hard for advice firms to ignore ESG and sustainability – even if the road towards sustainable financial planning has been longer and fuller of potholes than was initially expected.”

The regulator wants to address the importance of understanding sustainability, especially for the financial advice industry with its creation of the adviser sustainability support group aiming to help advisers get to grips with SDR.

Time will tell if advisers will start to increase their sustainable discussions with clients as the regulation beds in.