Assessing clients’ ESG preferences, a new technological challenge

The final version of ESMA’s guidelines on the assessment of clients’ ESG preferences was eagerly awaited, it came out the 23rd of September.

Even if they give a little more flexibility in terms of timing than the version that was submitted for consultation in January 2022, this new regulation only confirms the obvious: the assessment of clients’ ESG preferences will soon be a necessity and, above all, a top priority for all financial institutions.

Some might say that given the challenges facing the planet and the awareness of the ESG issues among the world’s citizens, it is more than timely that this assessment is made a priority and above all mandatory.

The complexity of the regulatory framework

However, others might argue that assessing investment objectives and preferences, without ESG considerations, is already a complicated and often indigestible exercise for clients. On financial matters, assessing sustainability knowledge, experience, status and investment objectives is not easy; adding the ESG label will make it even more difficult.

An additional factor of complexity is the structure of European legislation in this area. The taxonomy regulation with a classification of economic activities that is, to say the least, pretty dynamic and the regulation on transparency that uses complementary but different concepts, do not exactly coincide.

Beyond this complicated regulatory framework, the implementation of ESG preference assessment should generally take place at the very beginning of a customer’s relationship with a new financial institution, which is an important moment in the life of any relationship. It is therefore crucial that this moment is as pleasant as possible in terms of user experience.

This is where technology can and should help and can even become a real strategy asset.

The added value of technology

In recent months, many solutions have emerged that aim to enable a common ESG and investment profiling of clients.

Some have been developed by young fintechs and startups such as Sopiad which operates out of Belgium, or Oxford Risk, which is a little older and established in the UK. Gambit, which is now part of the BNP PARIBAS group, has also developed a module on the subject and Odona Tech, which is based in Grenoble, has done the same. Large companies specialising in financial information, such as Morningstar, have also embarked on this activity and taken this step.

At Neuroprofiler, we were one of the first players to launch an ESG assessment module that fits perfectly into our Risk and MiFID profiling applications. Thanks to the contribution of behavioural finance, a science that we intensively use in all our modules, we are able to accurately identify the wishes of investors in terms of environmental and social criteria.

By comparing the different applications now available on the market, it seems interesting to draw some initial conclusions:

The modules for assessing investors’ ESG preferences must remain very flexible because legislation is bound to evolve and change rapidly. For example, the European taxonomy is far from being stabilised.

The assessment of ESG preferences should be designed not to override other assessment topics required by MiFID, which is easier said than done.

The acceptance by the investor of lower financial performance on his investment in counterparty for a more environmentally virtuous management.

Another important point is that the assessment of ESG preferences should not lead to a deterioration of the customer experience. Whether at the beginning of the relationship or when renewing a profile, the assessment of these preferences is an important moment in the relationship with the bank. This experience should be positive and not just an administrative formality or a simple data collection. This is one of the reasons why Neuroprofiler uses gamification for this evaluation moment in order to involve the investor in a positive moment on motivations that are no less positive.

It is likely that these ESG preference assessment modules will develop strongly as this dimension is expected to grow in the coming years. The surge in extra-financial data from issuers and fund managers expected in the coming months will make this exercise even more necessary. Advances in technology such as the progress on artificial intelligence or the further development of behavioral science will for sure allow the ESG evaluation process to become more robust and hopefully less painful for the clients. With Neuroprofiler and the ESGprofiler, we will strive to remain at the forefront of innovation.