Creating good consumer outcomes in sustainable finance

By Rebecca Kowalski, company director, Overstory Finance

I’ve recently been writing the Consumer Duty section of a new Sustainable Financial Advice course. As a result, I’ve drawn the conclusion that it is highly beneficial to review sustainable finance through a consumer duty lens. 

As well as consultation and proposals on sustainable fund labels, the Financial Conduct Authority (FCA) is also working behind the scenes on adviser good practice around sustainable finance advice. This requires consideration of what happens between client and adviser long before the point of fund selection is reached. At this early stage, the emphasis should not be on investment funds and strategies (sustainable or unsustainable) but on who the client is, what they worry about, what they aspire to and whether they are interested in and ready to invest for positive change. A number of the Consumer Duty outcomes come into play here and certainly the cross-cutting rule “enabling consumers to pursue their financial objectives”.

Many advisers will share my view that exploring, defining and planning for life goals is the most valuable and rewarding part of their job. Enabling a client to enjoy a happy, healthy life after work or securing their children’s financial wellbeing makes financial planning very meaningful. The more time and care we can apply to this part of the advice process the better, but exploration of sustainable finance preferences warrants some special attention.

Aligning with the ‘Consumer Understanding’ outcome, advisers should make the most of the time and attention that the client can lend them, optimising their sustainability-related communication to inform, explore and test understanding. The majority of clients will be better served if they are provided with some form of information about sustainable finance risks, opportunities and choices. This information could be internally or externally produced, via website, brochure, video, podcast, or adviser discussion. It should ideally minimise jargon and encourage clients to think about their investment preferences in a bias-free environment, while avoiding creation of a barrier by demanding too much of their time.

After information has been created and delivered, how should the client’s understanding be assessed, another key part of Consumer Duty provisions? The client’s own words would be ideal. A client who now understands the importance of sustainability issues in finance is a good outcome both for investor, for finance and for the client file.

An even better outcome is a client who is empowered to express if and how they want to incorporate sustainability into their financial decisions and actions. The most effective empowerment requires a well thought out path from question and answer to solution or service. There are a number of ways the advice firm can look to make a positive difference at this exploration stage; here are a few suggestions:

• Re-think traditional client boxes – whether that be HNW, Cautious, Decumulator. It is time for a refresh and some brand new traits – changemaker/good citizen/challenger? There is some valuable work to be done in exploring how we can help clients identity and fulfil their roles in these times of transition.

• With sustainable investing, there will always be some trade-offs and nuances. Is that high street bank a greenwashing funder of fracking or a fast improving funder of essential energy? The FCA suggests sustainable funds should disclose any potential red flags; how about advisers line up the dominoes and discuss what might make clients see red before starting to select investment solutions. This would make invaluable information for the regulator and for fund manufacturers, I am sure.

• Expressing preferences is not best served by repetitive box-ticking. Advisers should educate clients about how portfolio creation works and how blending various financial and non-financial considerations can create the best outcome – for personal values and portfolio valuation. Restaurants ask if you are vegan or gluten free before informing you of available menu choices but do not ask you to list every food you do and do not like.

• Think outside of the traditional adviser service suite. What services and benefits could the advice firm offer that clients will value and that reflect the interests and capabilities of its staff? Are there ways to express sustainable preferences in addition to those that have an investment involved? Icing on the investment cake?

Consumer Duty also has a value for money outcome and a robust, well-rounded sustainable investment advice proposition is an excellent way of adding value. There is an increasing number of direct-to-consumer platforms and apps that focus on, or are branching into, the sustainable space and advisers need to compete with these across current and new generations of clients. Personalising and finessing sustainable finance education, exploration, engagement, empowerment and experience provides at least five big reasons for investors to consume the services of an adviser.