European banks and wealth managers face three major challenges when it comes to ESG investing. The first is credibility: according to a survey by Avaloq, 61% of affluent to very affluent investors in Europe question whether sustainable investing options are truly sustainable. The second major challenge concerns data. Since there is currently no standardized ESG rating system, the same company can receive different ratings depending on the agency, which makes it extremely difficult to draw meaningful comparisons between the sustainability performance of different companies and products. ‘investment. Martin Greweldinger writing
The final key challenge is time and whether a firm’s investment platform can ensure compliance with the new MiFID II rules by the looming August 2 deadline. From August, wealth managers with EU-based clients will be required to expand their investor suitability assessments to include ESG preferences. Under the latest amendment to MiFID II, wealth managers will need to proactively assess their clients’ sustainability preferences in the same way risk tolerance and investment knowledge are measured today.
ESG can no longer be an afterthought
ESG-based sustainability is a rapidly growing investment theme, driven in part by regulatory forces. And while many wealth managers already offer their clients access to sustainable funds and products, the onus is often on investors to request them specifically.
Sustainability preferences will now have to be an integral part of the investor profile. The upcoming MiFID II amendment not only requires a cultural shift within the industry, but wealth managers will also need to apply an ESG rating system – based on regulation as well as industry standards such as EET (European ESG Model) – to create a list of environmentally sustainable products and define how these products align with investor preferences.
A matter of compliance and reputation
Recent changes to MiFID II mean that ESG offerings are no longer just about gaining competitive advantage or meeting sustainability goals. It is now also a matter of compliance and reputation. Financial institutions need an investment platform that can transparently capture investors’ ESG preferences and incorporate them into suitability assessments. Technology can help by providing automated access to ESG ratings to help match investors’ sustainability goals with ESG data points.
Additionally, recent headlines on greenwashing will make investors even more discerning when it comes to choosing a sustainable investment solution that meets their personal goals and expectations.
Prioritize a gap analysis
As the August deadline approaches, wealth managers should perform a gap analysis to verify that their investment platform can ensure compliance with changing regulations for EU-based clients, with products from ESG investing backed by data that spans both discretionary and advisory mandates. This will allow them to identify any gaps in the investment journey and, if necessary, assess the need for a specific ESG solution for their business.
A wealth manager’s ESG solution should incorporate investor preferences based on the Principle of Adverse Impacts (AIP), set minimum sustainable investment allocations in accordance with defined taxonomy targets, and rank sustainable investments in accordance with regulation on Sustainable Finance Disclosure (SFDR) . These sustainability preferences should be applied throughout the investment advice and portfolio management process. The ESG solution should be able to model suitability rules and automatically gather sustainability data from trusted sources such as MSCI.
The easiest way for financial institutions to meet these new requirements is to add an ESG layer on top of their existing framework for determining investor suitability – with an expanded investor questionnaire, the addition of ESG ratings standard and new exclusion criteria.
The changing regulatory landscape will give ESG investing a much-needed overhaul and align it more closely with investor expectations – especially younger cohorts, who are the affluent clients of tomorrow. But it is also an opportunity for financial institutions to position themselves as ESG leaders instead of simply playing catch-up compliance. Taking a proactive approach and implementing a robust technology solution to quickly respond to this new regulation can boost a financial firm’s reputation and sustainability credentials, which will be vital for customer acquisition and retention in the future.
Martin Greweldinger is co-CEO of Avaloq