Key takeaways
- Clients' struggle to understand sustainability terminology, impacting their ability to express preferences. This undermines the purpose of regulations aimed at incorporating sustainability into investment advice.
- Firms lack consistent processes to match client preferences with suitable investment products, potentially leading to mismatches between client objectives and investments offered. This raises concerns about regulatory compliance and client satisfaction.
- Ambiguity in defining "sustainable investments" increases the risk of greenwashing, while advisors' approaches can influence clients' sustainability preferences. Clear communication and unbiased advisory practices are crucial for addressing these challenges and fostering transparency in sustainable investing.
The Swedish Financial Supervisory Authority (Finansinspektionen, FI) recently released a report examining how banks and investment firms are incorporating clients' sustainability preferences when offering investment advice. The report sheds light on several challenges firms face in implementing the new rules under the EU's Sustainable Finance Disclosure Regulation (SFDR) and MiFID II. In this blog, Datia summarizes the main challenges highlighted in the report:
Challenge #1
Understanding Sustainability Terminology
The report indicates that clients often struggle to comprehend the new sustainability-related terminology, such as "environmentally sustainable investments" under the EU Taxonomy and "sustainable investments" as defined by the SFDR. This lack of understanding can discourage clients from expressing their sustainability preferences, which contradicts the intended purpose of the new regulations.
Challenge #2
Inconsistent Processes for Matching Preferences
Many firms lack well-defined processes for matching clients' sustainability preferences with suitable investment products, according to the report. In some cases, firms lack such processes altogether, while in others, the processes cover sustainability preferences different from those outlined in the regulations. This raises concerns about whether clients are receiving investment products that align with their sustainability objectives.
Challenge #3
Greenwashing Risks
The ambiguity surrounding the definition of "sustainable investments" under the SFDR increases the risk of greenwashing, FI summarizes. Since the regulation allows fund managers significant flexibility in defining sustainable investments, there are substantial variations in how different products are classified. The report emphasizes the importance of advisors understanding and explaining these differences to clients to ensure their expectations are met.
Challenge #4
Advisor Influence on Preferences
The report also identifies a pattern where the advisor's approach to explaining sustainability and the questions asked during the advisory process influence the extent to which clients express sustainability preferences. Firms that describe sustainability in simple, concise terms tend to have a higher proportion of clients expressing sustainability preferences. However, the report cautions against processes that may steer clients towards preferences that match the firm's available products, emphasizing the need for a neutral and impartial approach.
Moving Forward
While acknowledging the challenges posed by the new regulations, FI urges firms to prioritize their implementation and make necessary improvements. The authority plans to follow up on how firms comply with the rules and work towards ensuring they address the identified issues. Firms are encouraged to consult the European Securities and Markets Authority's (ESMA) guidelines in their ongoing efforts.
The report highlights the need for greater clarity, improved processes, and enhanced client communication to ensure the effective integration of sustainability preferences in investment advice. As sustainable investing continues to gain momentum, addressing these challenges will be crucial for promoting transparency, preventing greenwashing, and enabling clients to make well-informed decisions aligned with their sustainability goals.
How Datia can help
Datia offers both data and software solutions for asset managers and wealth advisors to effectively assess sustainable investments.
Datia’s platform solves two challenges: first, in a step-by-step approach, it enables asset managers to create their methodology, choosing different indicators and setting thresholds; second, it allows asset managers to immediately evaluate what proportion of their portfolio is meeting their own criteria.
If you need help with any regulatory requirements as well as SFDR, we would be happy to assist you. Reach out to hello@datia.app.
To learn more about how Datia can help you book an introduction meeting with our team here.
Read more on Datia’s Sustainable Investments Screening solution.
For more information, read Finansinspektionen Challenges.
For inspiration, read Datia's analysis of 30 PAI statements.
