Advisers must prepare for stricter ESG standards, says Zenith

As stricter ESG standards come into effect in Australia and overseas, advisers will need to be more transparent with their clients when it comes to sustainability, according to Zenith Investment Partners’ head of responsible investment and sustainability, Dugald Higgins.

Mr Higgins warned that advisers, as well as fund managers, will need to be more specific about ESG in disclosure statements to clients and more conscious of how funds are labelled.

Australia is currently lagging behind other parts of the world on ESG disclosure, he argued, and a rapid shift needs to take place as clients continue to demand greater transparency.

“Australia is one of the worst countries when it comes to the transparency of portfolio holdings. It’s understandable that full holdings disclosure is problematic if you’re an active fund manager, but it’s also something more clients are seeking,” Mr Higgins said.

“The global shift on ESG standards is already happening, and Australia cannot afford to be left behind.”

As an example of how standards have already progressed overseas, Mr Higgins pointed out that advisers in Europe are required to ascertain whether their clients have sustainability preferences and, if they do, they must match products to them accordingly.

“If you’re a US adviser and you make ESG recommendations, you have to provide your clients with documentation on how you arrived at your recommendation and your methodology,” he continued.

“While the UK is currently finalising new enhancements, their regulator is highlighting a future preference for advisers to address sustainability in the advice process, and to obtain their clients’ sustainability preferences to ensure product suitability.”

Late last year, the Albanese government published a consultation paper on the development of a new mandatory corporate climate risk disclosure framework, which is set to be aligned to the Task Force on Climate-related Financial Disclosures (TCFD) and the International Sustainability Standards Board (ISSB).

While Australia plays catch up with other parts of the world, Mr Higgins suggested that this has also provided advisers with the opportunity to better navigate the regulatory space.

“While there are some differing industry views on minor details, none of the many submissions I’ve seen are saying we shouldn’t do it. It’s a pretty safe bet to say it’s happening, so you need to plan accordingly,” he concluded.