Ethics code creates confusion around ESG

A debate is raging about what the Financial Advice Standards and Ethics Authority's Code of Ethics means for ESG investing and advising clients on ethical investment options, with FASEA chief executive Stephen Glenfield looking to clarify the issue.

Standard Six within the Code of Ethics appears to be the source of the confusion, statingthat financial advisers must take into account the broad effects arising from the client acting on their advice and actively consider a client's broader, long-term interests and likely circumstances.

In the Code of Ethics Guidance, which FASEA released on 18 October 2019, there is this explanation offered in relation to Standard Six: "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."

Dave Rae, a financial adviser and owner of DPR Wealth, explained his reading of the code indicates advisers should be asking clients whether they would prefer to invest in an ethical or responsible manner.

For Rae, who is a member of the Ethical Adviser's Co-op and the Technical Working Group for the Australian Sustainable Finance Initiative, that would mean business as usual - however, for other advisers it could present a significant hurdle to jump.

"The way the explanatory statement is worded to me quite clearly says that every adviser will have to consider ethical and responsible investments," Rae said.

"And the only way you can consider that is by asking the client whether they have particular ethical considerations or preferences."

Stephen Glenfield, FASEA chief executive, offered this clarification to Financial Standard: "In short, Standard Six does not require the adviser to ask about ethical investments.

"Rather, where a client indicates they only wish to invest in ethical or green investments, Standard Six requires the adviser to consider whether this is in the client's best interest."

However, Rae is not alone, with others in the industry sharing his interpretation.

Ethical Advisers Funds Management recently launched new separately managed accounts which screen out investments in oil, tobacco, weapons, heavy polluters, gambling and coal.

Portfolio manager and head of research Luke Price explained the SMAs are designed to meet the potential increase in demand for ethical investments following the introduction of the FASEA Code of Ethics - which all advisers will have to be compliant with from 1 January 2020.

"It is basically the law from 2020 that all financial planners need to incorporate this type of advice into their recommendations," Price said.

"We believe these types of ethical investments will be in high demand going forward, particularly due to the new FASEA Code of Ethics for financial advisers."

A document released by the Financial Planning Association of Australia in April, when only the code and explanatory statement were available, also delved into the issue of ethical investing to help financial advisers understand Standard Six.

It included an entire sub-heading on ethical and responsible investments and suggested that advisers may have to consider limiting their recommendations where clients express a preference for ethical investments, but said that the consideration should be based on broader long-term interests and future circumstances of the client.

FPA head of policy and standards Ben Marshan explained the confusion has largely arisen by how delayed the FASEA guidance has been, and the authority's less than clear communication style.

"FASEA is basically saying where the client says they want ethical investments the planner has to take that into account," Marshan said.

"But equally, where the client says they don't want international shares the planner has to take that into account."

He said that while FASEA's real point may not be in relation to ethical investing specifically, but rather to investment preferences more broadly - that doesn't really clear up whether the questions advisers ask clients will have to change substantially under the code.

"The point the FASEA seems to be trying to push is that planners should get a better sense of their clients' investment preferences, and perhaps ask those questions rather than just go ahead with their default models," Marshan said.

"So yes, I think those conversations will have to happen under the code."

He explained that advisers have expressed confusion on this point to the FPA.

Rae said he too has had advisers come to him with questions about this element of the code. In his case, they are looking for advice on integrating ethical and responsible investing into their practice.

"I've had advisers ask me what funds I use and what questionnaire I use," Rae said.

However, he countered that the questions are not only FASEA related but also due to a general increase amongst clients in ethically minded investment options.

"FASEA's communication style is very unclear. They use a lot of contradicting statements in both the explanatory statement and the guidance," Marshan said.

"Planners are reading that and saying, 'Does this mean I always have to consider ethical investments?' We've had this conversation with them."

The FPA is currently working on a new document to explain the code to members in light of FASEA's guidance.

Despite Glenfield's attempted clarification, for Marshan, one thing is clear, time is still an issue.

"This leaves no time for planners to change their business models and actually be compliant," he said.

"There's not enough time to understand what FASEA is saying because it's still not clear, then make changes to all your advice processes and procedures."

The FPA is calling on FASEA to extend the time advisers have to be compliant with the code by two years.

Marshan pointed out that no matter how the point of ethical and responsible investing works in with the FASEA code there are potential changes to approved product lists to be made and that has to go through governance, something that takes time.

"FASEA's guidance is way too late," Marshan said.

"FASEA could support out call to give advisers an extension to be compliant with the code - particularly while there is actually no body monitoring compliance with the code."

For Rae, the issue is one of semantics.

"I'm not sure how you can consider whether recommendations can be limited to ethical and responsible investments without asking your client whether they have some preferences in that area," he said.

"How can you say you've considered it if you've never had that conversation, if you've never asked the client whether there are things they do not want to put their money into."

Read more: Stephen GlenfieldFASEA Code of EthicsEthics AuthorityFinancial Advice StandardsBen MarshanDave RaeFinancial StandardCode of Ethics GuidanceLuke PriceAdvisers Funds ManagementAustralian Sustainable Finance InitiativeDPR WealthFinancial Planning Association of AustraliaTechnical Working Group
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