Our approach to ESG Ratings

How financial advisers approach ESG investing is developing as the industry matures and increases in complexity. With regulation in Europe coming into force and new rules likely to be on the horizon in the UK we may see a meaningful change over the next 12 months. Notably, ensuring decision-useful information on sustainability is available and used during the decision-making process, as well as ensuring clients are able to pursue their financial objectives will likely be key.

Financial advisers have therefore started to take strides in this direction. However, assessing the ESG credentials of a fund remains a challenge for financial advisers, with many conducting their own research by using several different sources, as outlined in the image below taken from our recent adviser survey.

Our survey also indicated that although a majority of financial advisers witnessed an increase in the amount of client money being invested sustainably over the past year, that figure could be higher if data on sustainable investments was more readily available and comparable. A study by NextWealth similarly noted research of sustainable investing options as a particular gap for financial advisers, which is affecting their overall confidence with sustainable investing*.

This highlights a real pain point for financial advisers, and one which we are committed to help solve by introducing several ESG Ratings into FE Analytics over time. This will enable them to assess the ESG performance of funds, at the point of investment research, to help support an investment decision aligned to their clients' objectives and values.

Find out more about our first set of ESG Ratings, provided by ISS

By looking to introduce several ESG Ratings into FE Analytics, our approach can therefore be described as holistic. To us, we believe it is important that financial advisers can access, view and assess the range of information relating to the ESG performance of a fund, especially when making investment decisions on behalf of their clients.

In addition, one of the main challenges with ESG fund ratings is their lack of commonality between ratings providers. A fund’s ESG Rating will likely differ depending on the approach and methodology being used. For example, how they evaluate environmental, social and governance issues will likely be unique and can be subjective. Once again, we believe financial advisers would benefit from having good visibility of such information from a single location.

Although upcoming regulatory changes will seemingly place ESG at the heart of the financial planning process – which Ed Margot (Head of Client Investment Strategy at FE Investments) will soon outline in an upcoming article – the FCA have yet to define how financial advisers should approach ESG investing. What is clear though is that information will be key in assessing a clients’ sustainable preferences, researching and selecting appropriate investments and ensuring they meet a client’s goals.

*FE fundinfo, Financial Adviser Survey, 2022

*NextWealth, Sustainable Investing Tracker Study, 2022