Investment consultants advising asset owners could face “direct intervention” in the form of new regulations from the European Commission if they don’t raise their game on sustainability.
That’s one of the recommendations to come out of the High Level Expert Groupon Sustainable Finance, according to a leaked copy of the report seen by RI.
The report, due for release this week, notes how consultants – seen as the primary point of contact for many asset owners — have a “role and duty” in helping to deploy capital towards sustainability goals.
“Guidance as to the way how ESG should be integrated into their client interactions could help ensure investment consultants proactively consider ESG issues with them,” the report says.
But, significantly, the group also says that if this fails to have the desired effect, it recommends that the Commission should consider more direct intervention through MIFID II investment rules “or a new regulation explicitly aimed at investment consultants”.
The report notes that the “generic advice, asset allocation and manager selection elements” of the investment consultant market are largely unregulated.
It notes also that consultants do not systematically include ESG considerations within the information and generic investment recommendations that they provide to their institutional clients — “regardless of the materiality of such risks or their clients’ interest in considering them”.It continues: “Consultants often do not raise such issues because they are not raised by the client, but the clients often do not raise them because they are overly reliant on following the advice and agenda of the consultants.”
“A new regulation explicitly aimed at investment consultants”
This was “essential” to complement the HLEG-recommended changes to investor fiduciary duties to both incorporate material ESG risks into their investment strategy and to engage with beneficiaries and clients to establish and act upon their investment preferences.
Ominously for the sector, the report says that if investment consultants are to remain “trusted advisers” and develop their business they need to ensure that their clients “navigate these challenges effectively”.
It’s the latest pressure on the investment consultant sector. Just recently the Principles for Responsible Investment released a review in which it found that most consultants and their asset owner clients are failing to consider ESG issues.
It comes amid a wider focus on the industry from the likes of the UK’s Financial Conduct Authority (FCA).