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How responsible investing can be used to support your client segmentation

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With the momentum and regulatory focus on responsible investing growing, we take a look at how the approaches to it can not only help meet your clients’ needs but can help support your client segmentation under the PROD rules too.

Over the past 12 months, while the world has battled the coronavirus crisis, momentum behind responsible investing has continued to grow.

The pandemic may have helped to boost this drive, but political leaders across the globe have played their part too. President Biden has pledged the environment will be a key focus of his administration, China has stated its aim for carbon neutrality by 2060 and Boris Johnson has proposed a new raft of green reforms.

Meanwhile, the European Commission (EC) is progressing its green taxonomy plans and European Union (EU) regulation is being integrated into some of its directives in a bid to make responsible investing across the bloc easier. This includes an amendment to MiFID II where clients must be asked about their environmental, social and governance (ESG) preferences, as part of the advice process. Over time, the Financial Conduct Authority (FCA) may introduce similar rules for the UK.

Understanding the different approaches to responsible investing

The increasing momentum and regulatory focus on responsible investing is encouraging advisers to find out more about the different approaches to it. And, reflecting the times we're living in, to be able to meet clients' changing needs and preferences.

There's also a general assumption that the clients most interested in responsible investing are 'millennials'. But there's evidence to suggest otherwise. One of the findings revealed in The Great British Sustainable Savers Census 2020 highlights that it's people of a certain age group, who are thinking about their children's and grandchildren's future, who are behind the push for responsible investing. These investors are interested in a broad range of Environmental, Social and Governance (ESG) issues from protecting the planet to social injustice and their family's future is their primary motivator.

Responsible investing also presents an opportunity for advisers to help more clients' meet their financial goals as well as their personal values. According to data provider Morningstar, over the past decade almost six out of 10 responsible funds delivered higher returns than equivalent, conventional funds.

The range of responsible funds the investment industry now offer capture issues from climate change and human rights to avoiding investments based on ethical views, to investments that seek to address an environmental challenge. While terminology around responsible investing continues to be debated in the industry, it's generally accepted there are five types of responsible investment funds:

  • Integrated: Funds that embed ESG factors into the investment process. These funds aim to make better-informed investment decisions and to benefit from the active ownership of assets.
  • Impactful: Funds that contribute positively to the world by investing in companies that provide solutions, products or services that counter environmental and/or social challenges. They often choose to align their approach to recognisable standards, such as the UN Sustainable Development Goals.
  • Values: Value-focused funds invest according to the personal ethics or sustainability values of the investor. They tend to have a strong exclusionary approach where they exclude certain companies or industries, make positive selections based on their beliefs,or combine both approaches.
  • Sustainable: Funds that aim to manage sustainability issues on a more proactive basis. They invest in sustainable companies or other investment activities with better management of ESG factors. They avoid certain industries that are deemed unsustainable.
  • Thematic: Funds that aim to help investors benefit from specific responsible themes such as climate change or changing demographics and sustainable technology.
With the range of responsible funds available, along with the increasing momentum and regulatory focus on responsible investing, these approaches could help support advisers with their client segmentation under the PROD rules.

Segment clients based on their needs

The PROD rules were introduced to improve the processes adviser firms use to design, approve, market and manage products for clients. PROD is about good governance that should result in products that:

  • meet the needs of one or more identifiable target markets
  • are sold to clients in the target markets by appropriate distribution channels
  • deliver appropriate client outcomes.
As part of establishing a target market, adviser firms must segment clients based on their needs. Firms need to ensure there are sufficient service levels, investment solutions and platforms to cover the requirements of their clients.

Work out your clients' responsible investment preferences

If you choose responsible investing as a service to clients, it's important you understand the options for responsible funds and can speak with confidence on the subject. You need to work out each client's responsible investment preferences so consider the questions you ask during the client suitability conversation. These could include: 'Do you think it's a priority for your money to do good?', 'Do you think you'll benefit from a long-term investment?', and 'If you can do both, why wouldn't you do that?'.

You may want to introduce a responsible investing-style questionnaire to discover what's most important to clients. The benefit of the 'integrated', 'impactful', 'values', 'sustainable' and 'thematic' approaches are that they offer some structure for clients around responsible investing and can help you deliver an investment solution that reflects the views of your clients.

You should also review your Centralised Investment Proposition (CIP) to work out if the funds you have cover the breadth of your clients' responsible investing needs, and extending your CIPs if required. Our platforms for example offer a comprehensive investment offering, with access to a full base and range of responsible funds to meet client preferences and support good outcomes.

Once these steps are completed, you can work through your client list during each suitability review meeting and segment clients into suitable responsible investment solutions. Given FCA guidance on PROD that the 'target market should be identified at a sufficiently granular level', you may choose to take the segmentation process further and group your responsible segments into, for example, clients' life stages: 'saving for the future' (under 45s), the 'nearing retirement' (45-64) and the 'enjoying retirement' (64 plus).

Helping to support your growing regulatory requirements

In addition to delivering appropriate client outcomes, the key point about the PROD rules is that the FCA wants to see how adviser firms have tailored their service, advice and investment management for each client segment.

With the rise in responsible investing and governments across the globe embracing its principles for better outcomes for us all, consider taking full advantage of the opportunities it offers to not only help meet client needs but to help support your growing regulatory requirements too.

Speak to your usual contact if you need more information about how to meet your obligations under PROD or take a look at our blog series on PROD, and how to comply with the rules, starting here.

The value of investments can go down as well as up, and could be worth less than originally invested.

The views expressed in this blog should not be regarded as financial advice.