Mark Bland (left) and Nigel Stewart

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.

Tahn Sharpe is a Sydney-based financial services journalist with a background in financial planning. He writes on advice, superannuation, investment, banking and insurance issues, is a certified SMSF Adviser and holds an Advanced Diploma of Financial Planning. Contact at [email protected]
3 comments on “Advisers face ESG legal risk as REST case settles”
  1. Indeed it does

  2. FASEA Guidance is not meant to be strictly interpreted. They pose examples, scenarios, to help advisers understand the intent of the Code. Standard 6 for many advisers is around what the client sees in their future such as retirement, aged care estate planning etc. The introduction of the notion of considering ESG factors, as a potential long term impact, makes it clear that the traditional may not necessarily be enough. There are many potential long term impacts that can impact a client. After all, the work of a planner is not transactional, it is all about planning for the future.
    The Code interpretation is at adviser level and requires advisers to exercise a high level of professional judgement. The time to sit back and wait on the regulator etc has passed. In order to move to a profession, advisers need to have the ability to apply professional judgement. Unfortunately all the indications are there that there will a lawyer feast until finally this realisation dawns.
    Re ESG. If a client holds SRI values/preferences and an adviser doesn’t have the competence to provide a solution for that client, they need to decline the engagement. It isn’t a case of AFSLs running to import ESG into their offering. Naturally they will do this if they are targeting a broad range of clients. It must be remembered, just because a prospect enquires, it does not mean an adviser has to engage them. Self reflection to understand you and your firm’s competence is required.
    This is no different from a person asking the lawyer who performed a property conveyance service for them to prepare a comprehensive estate planning. If the lawyer doesn’t have the competence to undertake estate planning, the engagement will be declined.
    Point being, specialisation may be a better approach for some AFSLs to limit the breadth of service and to provide a higher level of competence in the areas of specialisation.

  3. Wow, it just keeps on getting crazier.

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