A last-minute settlement in the case brought by 25-year old REST Super member Mark McVeigh against the fund for failing to protect his savings against climate change risk has highlighted the legal threat to advisers who don’t proactively engage with clients on their ESG preferences, according to lawyer and Mills Oakley partner Mark Bland.
The risk for advisers regarding ESG inaction stems from Standard 6 in FASEA’s Code of Ethics, which requires advisers to “actively consider the client’s broader, long-term interests”. According to Bland, there is the potential for a similar scenario involving a client taking their adviser to court for failing to mitigate risk to their portfolio from climate change events.
“There’s an increasing risk of such a claim being actionable, particularly since the implementation of Standard 6 from the Code and the guidance behind it,” Bland says. “It’s doubtful a claim could be made in relation to a period prior to 1 January this year, when the Code came into force.”
The REST case – whereby the fund agreed to nine initiatives aimed at mitigating climate change financial risk consistent with standards set by the TCFD (Task-Force on Climate Change Financial Disclosures) – underscores the ESG obligations for advisers.
According to Bland, while the REST case doesn’t directly set a precedent because the case was settled out of court it does underscore the importance of Standard 6.
“The terms of settlement provide a standard against which advisers can compare how climate change risks are managed in different investment products and so impact the client’s long term interests, as required under the Code,” he says.
Too much ambiguity
According to Stewart Partners chairman Nigel Stewart, FASEA’s guidance doesn’t make clear what ESG obligations advisers are under.
FASEA provides this information on Standard 6 in the context of ESG considerations: “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.”
Exactly how that should be interpreted, Stewart believes, is anyone’s guess.
“I think one has to go and ask [FASEA CEO] Stephen Glenfield to state exactly what they mean by standard 6 in relation to ESG,” Stewart says. “What would be very helpful for the profession and the community is to get clarity.”
Standard 6 could be interpreted to mean it is incumbent on advisers to make ESG enquiries, he ventures.
“My own interpretation is that advisers should be exploring climate change, social issues and governance with clients and if they do that should be reflected in the advice,” he says. “But the guidance is confusing. For the sake of the profession it needs to be clarified; there’s too much ambiguity at the moment.”
While FASEA’s guidance gives scant direction on ESG, it does put the ethical onus on advisers to canvas any issue that may affect the client: “You are not relieved of the ethical duty merely because the client does not provide enough information, even when asked,” it states.
Licensees in the lurch
The case against REST Super – which is set to have far reaching implications for both super funds and their investment managers – could also prompt advice dealer groups to incorporate more robust ESG considerations into the frameworks of their licensed advice entities.
After the horrors of the Hayne royal commission, and ASIC’s ‘lookback’ program targeting licensees that have overseen breaches of the Corporations Act in the last decade, Bland says many licensees will likely move to nip ESG advice risks in the bud.
“I think licensees, as they will be ultimately liable, need to think about implementing licensee standards to provide guidance and certainty for advisers,” Bland says.
While ASIC made clear their expectations for companies in 2019’s Report 593 (Climate risk disclosure for Australia’s listed companies), the regulatory path for advisers on ESG remains clouded.
According to Bland, specific regulation may be a long time coming.
“It’s unlikely there’s going to be certainty from the regulators anytime soon as this is an emerging risk,” he says.