Journal

Posted November 25, 2020

Posted By Meghann Cannon

The REST settlement – your obligations to consider ESG principles in investment strategy and advice

Prepared by Rosie Jervis.

The settlement of a case brought against REST by a super fund member has potential legal implications not only for Super Funds but also for any Investment Managers and Advisers who fail to consider ESG principles as a part of investment approach and advice. 

Whilst Super Funds and Trustee Directors have legislative and fiduciary duties to consider members and beneficiaries interests the broader risk for financial advisers arises from Standard 6 of the FASEA Code of Ethics which imposes an obligation on advisers to actively consider their client’s broader and long-term interests.   

What you need to know?

 The case against REST, involved allegations that the fund failed to protect a member’s savings against climate change risk.   Specifically, the member argued that REST failed to provide information about how it was managing risks to investments from climate change and that this gave rise to a breach of statutory and fiduciary duties. 

The proceedings were subject to a last minute settlement in which REST agreed to nine initiatives in relation to mitigating climate change including enhancing their consideration of climate change risks for members.   Although the out of court settlement means that no legal precedent exists, this case is expected to give rise to similar legal challenges.

There are important implications for Financial Advisers considering ESG issues due to the impact of Standard 6 of FASEA’s Code of Ethics.

Standard 6 of the Code of Ethics imposes a direct obligation on advisers to ‘take into account the broad effects arising from the client acting on your advice and actively consider the clients broader, long-term interests and likely circumstances.’   

The Explanatory Statement for the Code of Ethics, at paragraph 49, notes that in relation to standard 6 advisers  ‘will also need to consider whether [their] product recommendations should be limited to “ethical” or “responsible” investments.’  

FASEA’s most recent draft guidance is silent on the issue of ESG considerations, however, an earlier version of guidance ‘FG002’ cautions that where ‘clients indicate they only wish to invest in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.’ 

Whilst the scope of standard 6 in relation to ESG considerations remains ambiguous, the guidance on Standard 2 also seeks to incorporate an obligation on advisers to consider the client’s broader and long term interests. According to FASEA, Standard 2 which imposes an obligation to act with integrity and in the best interests of clients also requires advisers to ‘look more widely at what the client’s interests are’ and to consider the  client’s long term interests and likely future circumstances. FASEA considers that  ‘it will not be enough for [advisers] to limit [their] inquiries to information provided by the client. [They] will need to make reasonable steps to inquire more widely into the clients’ circumstances’.

Whilst the commentary in relation to standard 2 appears in guidance only, the combined effect of this guidance and the legislative obligation in standard 6 may well be interpreted so as to require advisers to proactively engage with their clients about their ESG priorities and preferences.   

The risks and our recommendations:

A failure to proactively engage with clients in relation to ESG principles could result in advisers falling foul of the ethical obligations in standard 6 and standard 2 of FASEA’s Code of Ethics.  

Until such time as FASEA provides further clarity the scope of Standard 6, advisers should proactively engage with their client’s to ascertain their preferences in relation to ESG issues before providing advice.   In particular advisers should:

  • make specific enquiries to ascertain any broader and long term ESG issues, including climate change, which may be important to the client; and
  • ensure that if a client prioritises climate change and other ESG issues, that the client’s file clearly documents how the adviser determines whether the investment options meet the client’s broader long-term goals and interests. 

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