tisa_esg_briefing_slide_deck_1.pptx

28 April 2020 | 9.00 – 11.00 BST
Jeffrey Mushens
Technical Policy Director, TISA

Welcome from TISA – platform guide
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Why an ESG Briefing
 Because Government is interested
 Because the regulators want us to care
 Most importantly, because customers care
ESG Briefing - Preparing to deliver in 2021

Introduction to ESG
• What is ESG?
• What isn’t ESG
• Why ESG?

What do the Regulations say?
• What is the timetable?
• MiFID II
• ESG
• What the regulators say

ESG Timeline

ESG Timeline
Source: Eversheds Sutherland: Sustainable Investing - The roadmap for ESG and Sustainability

What do investment firms have to do?
• Asset managers
• Advisers
• Platforms

Decline of coal
• in 1922 1.1 million people worked in the mines
• In 2000, 11,000 worked in the mines (now 6,000)
• In 1922 237m tonnes were mined
• Now, about 20m.
Coal has not run out, nor will Oil, or Natural gas.
But will investments in Oil and Natural Gas go the way of Coal?

Introduction to Government objectives
Clean growth means growing national income while cutting greenhouse gas
emissions. Achieving clean growth, while ensuring an affordable energy supply for
businesses and consumers, is at the heart of the UK’s Industrial Strategy. It will
increase productivity, create good jobs, boost earning power for people right across
the country, and help protect the climate and environment.

UK and G7 economic growth and emissions reductions
In 2016, 47% of our electricity came from low
carbon sources, around double the level in 2010
and we now have the largest installed offshore
wind capacity in the world. Our homes and
commercial buildings have become more efficient
in the way they use energy which helps to reduce
emissions and also cut energy bills, for example
average household energy consumption has fallen
by 17% since 19901. Automotive engine
technology has helped drive down emissions per
kilometre driven by up to 16%

Opportunities and Challenges
The UK played a central role in securing the 2015 Paris Agreement in which, for the first time, 195 countries
(representing over 90% of global economic activity) agreed stretching national targets to keep the global temperature
rise below 2 degrees. The actions and investments that will be needed to meet the Paris commitments will ensure the
shift to clean growth will be at the forefront of policy and economic decisions made by governments and businesses in
the coming decades. This creates enormous potential economic opportunity –– an estimated $13.5 trillion of public
and private investment in the global energy sector alone will be required between 2015 and 2030 if the signatories to
the Paris Agreement are to meet their national targets.

www.tisa.uk.com 16
Action to deliver clean growth can
also have wider benefits. For
example, the co-benefit of cutting
transport emissions is cleaner air,
which has an important effect on
public health, the economy, and
the environment.

Government Approach
• In the context of the UK’s legal requirements under the Climate Change Act,
the UK’s approach to reducing emissions has 2 guiding objectives:
• To meet our domestic commitments at the lowest possible net cost to UK
taxpayers, consumers and businesses; and,
• To maximise the social and economic benefits for the UK from this transition.
• In order to meet these objectives, the UK will need to nurture low carbon
technologies, processes and systems that are as cheap as possible.
• We need to do this for several reasons. First, we need to protect our
businesses and households from high energy costs. Second, if we can
develop low cost, low carbon technologies in the UK, we can secure the
most industrial and economic advantage from the global transition to a low
carbon economy. Third, if we want to see other countries, particularly
developing countries, follow our example, we need low carbon
technologies to be cheaper and to offer more value than high carbon ones.

Key policies and proposals
• Accelerating clean growth
• Improving business and industry efficiency – 25% of UK emissions
• Improving our homes – 13% of UK emissions
• Rolling out low carbon heating
• Accelerating the shift to low carbon transport – 24% of UK emissions
• Delivering Clean, Smart, Flexible Power – 21% of UK Emissions
• Enhancing the benefits and value of our natural resources – 15% of UK emissions

What about the customers?

Objectives
• Why now?
• Consumer engagement
• Insight from other industries
• Making sustainability visual
• Collaboration & competition
• Next steps & summary

Why now?
• EC: Integrating sustainability risks and factors in
MiFID II (Nov)
• EC: Integrating sustainability risks into IDD (Nov)
• FCA: DC scheme trustees produce &
implementation report against their Statement of
Investment Principles (SIP) (Oct)
• EC: Deadline to adopt delegated regulation on
climate change adoption, mitigation and
environmentally sustainable economic activities
• ESMA: Advises on credit rating sustainability issues and sets disclosure
requirements (Jul)
• GOV:Green finance strategy –Transforming finance for a greener
future (Jul)
• FCA/PRA/TPR: Joint declaration on climate change (Jul)
• FCA: Climate Change and Green Finance (Response)
• BSI:PAS7340:SustainableFinanceFramework(Consultation)
• BSI:PAS7341:SustainableInvestmentManagement(Consultation)
• EC:Integratingsustainabilityrisksandfactorsin MiFIDII & IDD(Final
Rules)
• EC:IntegrationofESG intoinvestmentadviceandportfoliomanagement
(OJ publication)
• EU:Disclosuresrelatingtosustainableinvestmentsandrisks (FinalRules)
• PRA:Enhancingbanks’andinsurers’approachestomanagingthe
financialrisksfrom climatechange(Oct)
• FCA:SIPs tobeupdatedbytrusteestoincludenon financialmatters
andstewardshipengagement(Oct)
• FCA:DC schemesmust publishStatementof InvestmentPrinciples
(SIP) on publiclyavailablewebsite(Oct)
• FCA:FinalrulespublishedrequiringIndependentGovernance
CommitteetooverseefirmsESG policies.
• EU:Frameworktofacilitatesustainableinvestment(taxonomy)(OJ
publication)
• BoE:BESClimateStressTest2021 (Consultation)
• ESMA: Credit rating
disclosure
requirements become
effective (March)
• EC: European Council
and EP Agreement
(March)
• EP: Approves final
report at plenary
session (March)
• EU: Disclosures relating to sustainable
investments and risks (Sep)
• FCA: 2nd Assessing Suitability Review
(Findings)
Q3 Q1 Q2
Q3 Q4 Q1 Q2
Jan-20
2019
Q4
Jan-21
• EU: Sustainable Investment
Taxonomy - climate change (Jan)
• EC: Integration of ESG considerations
into investment advice and portfolio
management (Apr)
• EC: Harmonised templates and
taxonomy for ICT incident reporting
(Proposals)
• TEG: Final report on EU taxonomy (June)
• ESAs:Technical standards for regulation
on sustainable disclosures (Technical
Standards)

Consumer Engagement
• Advice gap across protection,
pensions & investments
• When should consumers
engage?
• Customers can go it alone
• Some choices are tough
• Confidence is low
• Value for money
• Easy to delay

Making Sustainability Visual
Middle
People, planet and fair play clusters
useful for engaged consumers. Each
small square represents a pressing
issue, with relevant colour (explained
below right) to depict the level of
engagement.
Top
Overall rating that is easily comparable
for all consumers.
Bottom
Information whether harmful industries
are contained or excluded from the
fund.

Carbon
Emissions
Responsible
Consumption &
Production
Climate
Control
Waste & Recycling
Energy Source &
Use
Biodiversity &
Habitat
Preservation
Animal
Welfare
Water
Scarcity

Employee
Remuneration
Good health &
Wellbeing
ShareholderVoting
Rights
Executive Pay &
Remuneration
Supplier
treatment
Quality Education Innovation Stewardship
Customer
Management
Equality Diversity
& Inclusivity
Board Independence
& Diversity
Tax & Accounting
Standards
Health & Safety Social Impact Regulatory
Standards
Culture &
Transparency

Passive FTSE
Tracker
Active Multi-Manager
Fund
Environmental Impact
Fund
For illustrative purposes only, not representative of an individual fund

Eversheds Sutherland | 17 July 2022 |
What does consumer want vs what manufacturer is selling
Investor objectives
• The question of an
investor’s objective, may be
discrete from the objective
of the product:
• Purely financial
objective (capital
growth, income, tax
efficiency)
• Financial but
accounting for SRI
principles
• SRI focussed but
seeking a return (e.g.
prepared to sacrifice
performance)
• Essentially
philanthropic
─ The product should
potentially cater for the
lowest common
denominator.
─ Tools might be used to filter
products. This should be a
function of the manufacturer
making available information
about the product and
platforms/advisers can use
this.
• The best product for a
particular investor
may not be the one
that describes itself
best in the terms that
investor is looking for.
• E.g. a product called
“nuclear free bond”
might appeal to
certain investment
preferences but there
may be products with
better performance
and other
characteristics that
make less of a selling
point of that specific
feature.
• So cannot rely solely
on manager
categorisation.
─ Manufacturer should
describe the product’s
objectives
─ Disclosure should be simple
30
Notes from TISA Ideation Day

What product is actually doing vs trying to do.
Investor objectives
31
What the product is trying to do
• Looks at manufacturer’s methods
• Manager can probably assess this
• But could still be external. E.g. expert
panel / independent rating / accreditation.
• There is a Belgium eco label – consider?
• Important: Disclosure method. There must
be consistency of disclosure and for all
products (even non-ESG ones)
• This approach can factor in activism etc
that might not be reflected in the portfolio
What the product is actually doing
─ Looks at the portfolio
─ Needs external assessment to gain trust
• Look at the portfolio weighed across assessment
period?
• Look at the portfolio as is or how the constituents
have improved etc?
─ Use a single standard or multiple?
• E.g. fairtrade / rainforest alliance
• E.g. credit rating agencies (AA vs Aa2 etc)
• Must be an integrity of underlying data
• Must be a consistency / comparability /
correlation of ratings

Ratings
• Would want a ‘rating’ (e.g. 5*) to be on the
same methodology, so comparable
• Ideally independently
calculated/verified/audited
• Would need a ‘vintage’ as the rating could
only be accurate at a single point in time
• May require legislative compulsion on
underlying investments (other groups might
consider)
• A single rating covering all attributes would
be reductive. Nuances get lost and good
products may look poor when assessed
against criteria they aren’t seeking to
compete in.
Our concern is that while it might be what an
investor would say that they want, a single
score/rating would not allow sufficiently for
nuance.
That argument can be said for ‘ESG’ as a group
but equally to a rating applied just to ‘E’.
We prefer a focus on what manufacturer
wants to do and less on what portfolio
contains (at this stage at least)
32

Potentially there could be some sort of
recognisable industry logo and an agreed slogan.
We thought ‘responsible investment’ or
something based on ‘SRI’ might be easier to
understand than ESG or sustainability
This label looks at the manufacturer’s intentions
rather than the resulting reality (i.e. is ex ante not
ex post). We would label this the ‘investment
intention’ or similar
The entire label could be used on any document
as brief summary. However, we propose that it is
used to best effect on a broader ESG-summary
(shown overleaf)
We liked substitution of ‘ESG’ with People, Planet
and Fairplay. However, we felt that ‘fairplay’
might not capture the totality of ‘governance’ and
therefore suggest ‘company management’.
If we went with longer descriptions, we could
label this with ‘how well is the company run?’
We explored ways of explaining the integration of
ESG into the investment philosophy. Phrases like
‘impact’ investing may be understood in the
industry but we thought it might be more readily
understandable to explain to what extent the
manager prioritises the particular attribute – and
suggest ‘basic’, ‘core’ and ‘priority’.
We suggest avoiding the colour green, to avoid
inferences of green=environment and/or
green=good.
No specific preference for blue
A presentation that uses all three (or more)
phrases helps to contextualise where on the scale
of engagement the manufacturer sits on the
subject in question. Key in existing scorecard
does similar
This could be presented
in other ways e.g.
Core
Mockup: Phil Spyropoulos, Eversheds
Sutherland

MUNITIONS
THIS PRODUCT LIMITS
EXPOSURE TO THESE
INDUSTRIES AND
PRACTICES
GAMBLING
TOBACCO
THIS PRODUCT MAY
INVEST IN THESE
INDUSTRIES TO DRIVE
CHANGE
THE PRODUCT WILL
SEEK SUITABLE
INVESTMENT IN THESE
INDUSTRIES WHICH WE
CONSIDER POSITIVE
ANIMAL TESTING
ALCOHOL …AND 8 OTHER
CATEGORIES
ENERGY
STORAGE
TECHNOLOGIES
AVIATION
CONSTRUCTION
PHARMACEUTICALS
SUSTAINABLE
AGRICULTURE
PETROCHEMICALS
SUSTAINABLE
FISHING
RECYCLING
TECHNOLOGIES
AGROCHEMICALS
ELECTRIC
AUTOMOTIVES
5%
5%
5%
5% 5%
MAXIMUM
INDIRECT
EXPOSURE
5%
XYZ INVESTMENT PRODUCT
OPERATED BY INVESTMENT HOUSE
Description of investment strategy…..
GAMBLING
5%
THIS PRODUCT LIMITS
EXPOSURE TO THESE
INDUSTRIES AND
PRACTICES
Rather than using jargon like ‘screening’, it may
be more effective to just explain the approach in
relation to such industries/companies
The icons next to the text give an indication of
what to expect:
• minus/do not enter sign: to show an exclusion
• an exclamation: to show that there is
something reader is alerted to
• The tick: to show that certain investments are
thought of positively
Building on the iconography in the strawman
example, we suggest a text label next to each icon
to ensure understanding. An exposure threshold
is also stated – and there is a key at the footer of
the page.
…AND 8 OTHER
CATEGORIES
The “…and X other categories” allows
reproduction on paper with a prioritised list of
exclusions (e.g. manufacturers top 5) with further
information provided in an online/app formats.
Mockup: Phil Spyropoulos, Eversheds
Sutherland

How are ESG criteria expected to affect returns?
35
32%
of advisers
expect ESG funds to
underperform
14%
of fund investors expect
ESG funds to underperform
12%
think they will
outperform
43%
think ESG funds will
outperform

The technical voice
“Exclusions at worst don’t destroy
value… At best they deliver a bit of
alpha.
Quant back-testing reveals G adds
value and E and S destroy value…”

What do we know people want to see?
37

Delivering the data

EFESO © 2019
Istanbul - Lisbon - Mexico City - Milan - New Delhi - New York - Paris - Riyadh - São Paulo - Seoul
Shanghai - Singapore - Saint Petersburg - Stockholm - Tokyo
Abu Dhabi - Amsterdam - Barcelona - Berlin - Birmingham - Brussels - Budapest - Buenos Aires - Cairo - Galway - Gothenburg
ESG DATA EXCHANGE : HOW TO IMPROVE SCORING
RELIABILITY AND TRANSPARENCY ?
TISA ESG CONFERENCE – 24 SEPTEMBER 2019

EFESO © 2019
Istanbul - Lisbon - Mexico City - Milan - New Delhi - New York - Paris - Riyadh - São Paulo - Seoul
Shanghai - Singapore - Saint Petersburg - Stockholm - Tokyo
Abu Dhabi - Amsterdam - Barcelona - Berlin - Birmingham - Brussels - Budapest - Buenos Aires - Cairo - Galway - Gothenburg

41
EFESO © 2019
ESG PROJECT
How to compare and select Funds from an ESG point of view ?

42
EFESO © 2019
ESG PROJECT
Two main approaches to be combined
Asset Management company and
Funds investment process evaluation
 Asset Management company ESG related
policies and commitments.
 Strategy and investment process of the fund.
› Investment objectives of the fund : from “pure
financial performance”, “ESG integration” to
“impact investing” and “philanthropy”.
› Exclusions policies to avoid investments in
controversial economic sectors and/or
activities
› ESG “screening” to select investments
Portfolio Analysis
(look through)
 ESG scoring of portfolios based on a look
through approach
 Aggregated extra financial indicators (carbon
intensity…)

43
EFESO © 2019
ESG PROJECT
Asset management and fund investment process evaluations
 The approach is based on rising standards and label
across Europe :
PRI, FNG Siegel, Febelfin, Luxflag, Umweltzeichen,
Nordic Swan ecolabel… No common standard at this
stage….
 These Labels do have different views :
› Organization and attribution of the label
› Asset classes covered
› Scope of ESG topics (ie Environmental, Social or
Governance issues)
› % of portfolio covered by ESG analysis
› Exclusion policies
› Requirements : specific reports, commitments…
› Grade

44
EFESO © 2019
ESG PROJECT
Portfolio approach
 The approach is based on evaluating the positions of
the fund portfolio either by scorecards methods or key
ESG indicator computation.
 Raw data availability and sourcing, combined with
materiality considerations may alter the significance of pure
ESG indicators approaches.
 Scoring approaches are more holistic but scorecards
based only on metrics are giving a false sentiment of
objectivity.
 In this context,
› ESG analysis coverage is a key element
› We need to be able to compare the different approaches
followed by analysts ( weighting of E/S/G, key ESG topics,
metrics…)
773984
9594
3776
23663
8749
839642
873984
9594
2776
56663
2149
469642

45
EFESO © 2019
ESG PROJECT
The E project initiative
 Launched in march 2018
 Should cover the fund investment process approach and portfolio approaches
 First draft issued in June 2019, consolidating different views and standards from across Europe
and all kind of products, to be completed
A common ESG data dictionary to exchange ESG information on Funds between investors, distributors,
services providers and asset managers
Portfolio approach
ESG analysis coverage 
Key metrics

ESG score
Asset management and fund
process evaluation
Asset management company policies and commitments 
Fund strategy and policies 
Fund exclusions 
Fund ESG screening approach 

46
EFESO © 2019
ESG PROJECT
Some few basic rules need to be defined to enhance transparency on ESG rating of
portfolios and funds
 Scope of ESG data published by issuer supporting the assessment
 Materiality of ESG data ( at issuer level, financial instrument level, portfolio level)
 Raw data collection process : sourcing, normalisation, estimation…and confidence level
 Quantitative versus qualitative evaluation
 Actual vs projected situation : Time horizon
 Scope and weight of the different ESG topics for scorecard approaches
 Risk versus opportunity focused
Multiple topics are causing different appreciations of a given portfolio and need to be addressed by industry
participants ( issuer, distributors, asset managers…) and by specialists (ESG and financial analysts, Risk
manager, Portfolio managers…).

ESG data quality is improving rapidly
For illustrative purposes only.
Limited ESG
Data
Holistic
ESG
Insights
FOR PROFESSIONAL CLIENTS AND QUALIFIED INVESTORS ONLY
#1

57 36 US Fed
Carbon pricing initiatives
have been implemented or
scheduled for
covering >20% of global
greenhouse gas emissions
central banks and
supervisors have joined the
“Central Banks and
Supervisors Network for
Greening the Financial
System” (NGFS)
“The Federal Reserve does
use its authorities and tools
to prepare financial
institutions for severe
weather events.”
-- Jerome Powell, Chair of
the Federal Reserve
Source: World Bank. “Carbon Pricing
Dashboard” portal, with data as of
July 2019:
https://carbonpricingdashboard.worl
dbank.org/map_data
Source:
The Central Banks and Supervisors
Network for Greening the Financial
System (NGFS), using network
member data as of June 2019:
https://www.mainstreamingclimate.
org/ngfs/
Source: Board of Governors of
the Federal Reserve System,
Memo from Jerome Powell. April
2019.
https://www.schatz.senate.gov/i
mo/media/doc/Chair%20Powell
%20to%20Sen.%20Schatz%204.1
8.19.pdf
FOR PROFESSIONAL CLIENTS AND QUALIFIED INVESTORS ONLY
Studies are for illustrative purposes only; they are not meant as a guarantee of any future results or experience, and should not be interpreted as advice or a
recommendation.
#2

>4% 15% 90%
studies find a nonnegative relationship
between ESG and corporate financial
performance, of which 63% reports
positive findings, a meta-analysis on
>2000 studies shows
more alpha reported for
companies with top quintile
ratings on material
sustainability issues vs. firms
with bottom quintile ratings, a
study finds
Increase in volatility in stocks
with worst ESG exposures and
up to 3% increase in betas, than
stocks with the best ESG
exposures, AQR finds
Source:AQR,(2017) ,
https://www.aqr.com/Insights/Resea
rch/Journal-Article/Assessing-Risk-
through-Environmental-Social-and-
Governance-Exposures
Source: Journal of Sustainable
Finance & Investment (Friede,G.,
Busch,T. and Bassen, A.), “ESG and
financial performance: aggregated
evidence from more than 2000
empirical studies”, November 2015
#3
Source: Khan, Serafeim andYoon (2016),
“Corporate Sustainability: First Evidence
on Materiality.”
https://dash.harvard.edu/bitstream/handl
e/1/14369106/15-073.pdf?sequence=1
FOR PROFESSIONAL CLIENTS AND QUALIFIED INVESTORS ONLYBSIH0919E-955095-19/38
Studies are for illustrative purposes only, using data as of 2016, 2017, and 2015, respectively; they are not meant as a guarantee of
any future results or experience, and should not be interpreted as advice or a recommendation.

Regulatory Perspective –
ESG/Sustainable Finance
51
Presentation to TISA ESG Conference
Mark Manning, 24 September 2019

Overview
52
• The market for sustainable finance
• The role of regulation
• Some key areas of focus for the FCA
o TCFD recommendations
o Shareholder engagement and stewardship
o Product disclosures and advice

Key drivers of the growth of sustainable finance…
• Urgency of the climate threat
• Public policy direction of travel
• Shifting corporate attitudes and evolving consumer preferences
Sustainable finance… a niche that is
becoming mainstream (i)
53

Sustainable finance… a niche that is
becoming mainstream (ii)
54

Sustainability issues
55
Source: Sustainability Framework, Sustainability Accounting Standards Board

• Finance can support the transition to a sustainable long-term future
• Regulatory settings internationally and domestically are adjusting to
accommodate this role
o In Europe this is being done via the Sustainable Finance Action Plan
• Impacts the FCA as both securities regulator and conduct regulator
o Relevant to our strategic objective to make relevant markets function well
o And our operational objectives: market integrity, consumer protection and
competition in the interests of consumers
• Work in this area requires close cooperation with Government, industry
and other regulators
o E.g., initiatives like the Climate Financial Risk Forum
The role of regulation
56

57
A spectrum of strategies
Note. Some assets are managed using more than one strategy

58
Most sustainable finance activity is
currently in these strategies

Issuer disclosures: TCFD
recommendations
• In October 2018, we issued a Discussion Paper (DP 18/8) on
climate change and green finance
• Disclosure (by both issuers and firms) was a key area of focus
• Extensive feedback on TCFD – considering this carefully
• Aim to publish a Feedback Statement in the coming weeks
• Government’s Green Finance Strategy – included the following:
• Government expects all listed companies and large asset owners to
disclose in line with TCFD recommendations by 2022
• Government-led cross-regulator task force considering how best to
achieve this expectation
• Funding a British Standards Institution (BSI) initiative on standards for
sustainable finance
59

Some key areas of focus for FCA
60
Issuer
disclosure
initiatives
We want issuers to inform the market
on how ESG factors impact company
prospects
We want regulated firms to give
appropriate consideration to ESG in
their business, risk and investment
decisions
We want consumers to have access
to products that meet their needs and
preferences, and receive reliable
disclosures and advice
Stewardship
and
shareholder
engagement
Product and
service
disclosures/
investment
advice

61
EU Sustainable Finance
Action Plan is promoting a
positive impact

TCFD – Key elements of disclosure
62
Source: TCFD Final Report, June 2017

Stewardship & shareholder engagement
• A long-term perspective in investment decisions is particularly important
where clients and beneficiaries have long-term liabilities (eg, pension
funds)
• Active stewardship and shareholder engagement contribute to a long-
term perspective
• We have a number of relevant initiatives in this area:
o In June, new FCA rules for insurers and asset management came into
effect, aligned with SRD II
o In parallel, we issued a joint Discussion Paper with FRC (DP 19/1) calling
for strategic input on investor stewardship
o FRC consulted at the same time on revisions to UK Stewardship Code
o In related work, we consulted earlier in the year on the duties of
Independent Governance Committees
63

Constructive oversight, engagement and challenge
Culture and institutional structures that support effective
stewardship
Disclosure and transparency of stewardship activities
Clear purpose
Key Attributes of Effective Stewardship

Agenda
65
The challenge
ESG integration - what is it?
Impact of MiFID and Disclosure regulations
ESG data issues
Labelling – anti-greenwash provisions
Client-facing issues
Reviewing ESG in your business
How we are approaching ESG in our business
Charles Stanley :
Distributors - key regulations

66
1. Delegated Regulation amending MiFID II as regards
the integration of Environmental, Social and
Governance (ESG) considerations and preferences
into investment advice and portfolio management
(the ‘MiFID ESG regulation’)
2. Regulation on disclosures relating to sustainable
investments and sustainability risks
(the ‘Disclosure regulation’)
Both apply 12 months following publication in the EU
Official Journal (Nov/Dec 2019).
Effective from November or December 2020,
regardless of the Brexit outcome (both are listed in
HMT’s onshoring regulations).
For distributor firms the two key EU regulations are:
Distributors - key regulations

67
54(2) Investment firms shall determine the extent of the
information to be collected from clients in light of all the
features of the investment advice or portfolio management
services to be provided to those clients. Investment firms shall
obtain from clients or potential clients such information as is
necessary for the firm to understand the essential facts about
the client and to have a reasonable basis for determining, giving
due consideration to the nature and extent of the service
provided, that the specific transaction to be recommended, or
entered into in the course of providing a portfolio management
service, satisfies the following criteria:
(a) it meets the investment objectives of the client in question,
including the client’s risk tolerance and any preferences,
including ESG preferences, where relevant;
(b) it is such that the client is able financially to bear any related
investment risks consistent with his investment objectives;
(c) it is such that the client has the necessary experience and
knowledge in order to understand the risks involved in the
transaction or in the management of his portfolio.
ESG preferences means a client’s or potential
client’s choice as to whether and which
environmentally sustainable investments, social
investments or good governance investments
should be integrated into his or her investment
strategy.
COBS 9A.2.4 (Assessing the extent of the information required: MiFID business)
MiFID ESG regulation - The challenge…

68
Taking account of ESG risks to investments when making
decisions or giving advice.
Making the planet a better place is a second order effect.
Regulatory view is that:
1. ESG integration should results in improved financial
performance. It is not a trade-off.
2. Firms should be considering ESG risks already
(MiFID).
Some thoughts:
If ESG integration is about mitigating risks to
investments, firms need to integrate ESG into
advice/decisions as a standard practice, regardless of
client preferences. In which case, what is the point of
collecting client preferences?
Impact of new EU regulations on Funds
(UCITS and AIFs), which must integrate ESG.
Role of emerging EU Taxonomy unclear….
Finally…
Will ESG integration really help achieve the SDGs?
ESG integration = mitigate ESG risks to financial performance
ESG integration – what is it?

69
1. Services in scope: Discretionary Management,
Advisory Dealing/Managed, Financial Planning.
2. Mandatory, not optional. Must collect KYC on client
ESG preferences and, where they exist, act on them.
3. Suitability:
a) Firms must be able to assess a client’s existing/
transferred investments.
b) SYSC/evidential implications - similar to
volatility/market risk.
c) ESG considerations must be incorporated into
policies and procedures, including T&C.
4. ESG is not about:
a) ‘Ethical’ investing (negative screening).
b) Impact investing.
c) Expressly labelled ‘green’, ‘ESG’ or ‘sustainable’
investments.
d) Just about products. Direct investments in scope.
e) Buy lists, as existing investments also in scope.
f) Stewardship/engagement.
5. Client ESG preferences do not take precedence
over ‘core’ Suitability (the mandate). First we satisfy
core Suitability, then within the agreed mandate we
take account of any ESG preferences.
6. ESG preferences are aspirational, not a guarantee.
Key issues:
Impact of MiFID and Disclosure regulations

70
Depends on nature of firm’s service offering:
1. Restricted vs whole of market
2. Funds-only vs. mixed asset
3. Models vs. bespoke
Issues:
1. How will your firm obtain ESG data?
2. Which ESG rating tools perform better?
3. What about the data gaps?
4. How do client ESG preferences map to ratings?
Can these vendor/IT issues be resolved by Q4 2020?
Firm’s own ESG analysis vs. buying in third party ESG data
ESG data issues

71
Only Funds and Model Portfolios should consider such labelling.
Not clear if bespoke portfolios can meet with the requirements,
which apply to expressly labelled funds / Disc. portfolios.
1. A benchmark relevant to the ESG ‘target’ must be selected.
2. Pre-contractual information needs to include
a) information on how the designated index is aligned with that target;
b) explanation as to why the weighting and constituents of the
designated index aligned with that target differ from a broad market
index.
3. Client terms need to
a) explain how ‘remuneration policies… are consistent with the
integration of sustainability risks and are in line, where relevant,
with the sustainable investment target of the [Fund or Discretionary
portfolio]’.
b) include a reference to a prominent webpage where further
references to benchmark/index methodologies can be kept up to
date; the methodologies are not the distributor’s, but those of the
benchmark/index providers.
4. Distributor’s website needs to show, for each relevant
Fund/Discretionary portfolio:
a) the information above;
b) a description of the sustainable investment target;
c) information on the methodologies used to assess, measure and
monitor the impact of the sustainable investments selected,
including its data sources, screening criteria for the underlying
assets and the relevant sustainability indicators used to measure
the overall sustainable impact.
5. Quarterly periodic reports need to include
a) the overall sustainability-related impact by means of relevant
sustainability indicators; and
b) where an index has been designated as a reference benchmark, a
comparison between the overall impact of the portfolio with the
designated index and a broad market index in terms of weighting,
constituents and sustainability indicators.
6. If a Fund/Discretionary portfolio has an express carbon reduction
target, it must benchmark against the targeted low carbon emission
exposure (there appears to be an EU standard for this in development,
which may become mandatory once finalised).
Difference between ESG integration and
labelling fund/portfolio as ‘ESG’, ‘Green’ or ‘Sustainable’
Labelling – anti-greenwash provisions

72
1. Client KYC updated to include ESG questions:
a) KYC more granular than ‘ESG’ in aggregate, we may need
to collect preferences on E, S and G. This is because the
definition of ESG preference includes the client’s choice
as to whether and which environmentally sustainable
investments, social investments or good governance
investments should be integrated into his or her
investment strategy
b) ESG questions must be positioned later in the on-
boarding documentation than the ‘standard’ Suitability
KYC.
c) Question: how to map ESG preferences to an ESG profile.
2. Client terms need to include:
a) section explaining how integrate ESG factors into our
investment decisions;
b) ESG risk factor; and
c) limitation clause - no guarantees, and ESG factors are
only one set of factors amongst many.
Explanation of ESG considerations needs to be added to
websites and brochure-ware.
3. Repapering clients: Q4 2020 for Terms update, but less
clear when we need to capture ESG KYC on existing
Discretionary/Advisory clients.
4. Suitability reports for Advisory clients updated to
evidence how a client’s investment objectives have been
achieved, with reference to expressed ESG preferences. No
exemption for Sale recommendations.
5. Periodic client reporting: regulation silent on ESG in
quarterly or annual reports, however general obligation in
MiFID to report to clients on services provided.
6. Website polices on ESG integration: online UK
Stewardship Code disclosure or Engagement Policy needs
to be updated to reflect ESG integration.
Client-facing issues

73
ESG working group to assess impacts on your firm, before commencing project.
Senior management engagement.
Move fast…
Reviewing ESG in your business
Proposition
Research/
Data Systems
Investment
managers
Regulation
Investment
Philosophy
Build on the initial
conversations with data
providers and propose
the recommended
solution(s).
Understanding what
information we need
and how users/systems
need to access it.
Looking at what the
market wants/expects
and how ESG/ethical we
think our offering
should be.
How will we educate
and explain information
to clients/prospects,
building on the
taxonomy that we
believe clients will relate
to and understand.
Undertake gap analysis
around knowledge &
experience of
incorporating ESG/
ethical information into
our practitioners’
investment process and
understand what
additional information
and training is required
for IMs.
Formulate the house
view - our ESG/ethical
policy and taxonomy.
Looking at the new
requirements coming
into effect in the near
future.
This will include the
information we will
need to collect on client
preferences, how this
will be incorporated into
reporting to clients and
the SYSC issues, such as
MI to senior managers.
Charles Stanley’s
own ESG rating
Looking at Charles
Stanley Group PLC’s
own ESG rating against a
set criteria, as it was
agreed that it could be
detrimental to go out
with a strong
ESG/ethical message if
we do not show as an
organisation that we
care about these things
ourselves as a company.
Charles Stanley workstreams:

What TISA is doing
• Communicating with customers
• Data standards

Objectives of the TISA ESG ExCo
• Understand the regulatory requirements, including timetable
• Implement
• Develop good practice guides
• Recommend templates for a standard way of reporting and disclosing
• Derive data standards to underpin reporting

• We want a simple way of showing how a product is E, S, G on a consistent,
objective and comparable basis.
• So customers and their advisers can make meaningful choices.

How we are doing the work
Three working groups
• MiFID II Distributor Guidance
• Communicating with customers
• ESG/Impact data

tisa_esg_briefing_slide_deck_1.pptx

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