Sustainable Finance: Speaking The Language Of The Customer

A number of disruptive changes are currently affecting the fund industry, not least of which is the rise of sustainable finance. How can it be that everybody is talking about sustainable finance as the future of the industry, but that such a small proportion of retail investors are actually buying sustainable products?1 Could this all be a distribution issue?

Over the past 10 years, sustainable finance has been very much looked at through the prism of both asset managers and institutional investors; however, the debate largely missed out the very end of the investment chain before the client itself—the financial advisor, the one actually giving investment advice.

Under the existing MiFID II framework, firms providing investment advice and portfolio management are required to obtain the necessary information about the client's knowledge and experience in the investment field so as to provide services and products that are suitable for the client. While this suitability assessment generally relates to financial objectives, it does not address the non-financial objectives of the client, such as environmental, social, and governance (ESG) preferences.

This is about to change as, in its final recommendations report, the HLEG2 has specifically requested that investment advisers "ask about, and then respond to, retail investors' preferences about the sustainable impact of their investments, as a routine component of financial advice.”

In response to this, the European Commission has launched a consultation process to assess how best to include ESG considerations in the advice that investment firms and insurance distributors offer to individual clients. The idea is to amend delegated acts under MiFID II and IDD3 so as to better address non-financial considerations in financial advice.

Now comes the trickiest question—how can financial advisors assess the ESG preferences of their clients? The questions we are asking clients are a good place to start. If you pose the question "Are you interested in sustainable investing?" then the answer is likely to be a resounding "yes." A 2017 study carried out by Morgan Stanley4 shows that 75% of individual investors are interested in sustainable investing, with a higher rate of 86% among millennials.

But of course, reality is a little more complex than that. Sustainable investing comes in many different shapes and formsthe strategies and end objectives are as diverse as you can imagine. They can range from...