An eagerly-awaited document

This document was particularly eagerly awaited, as it followed two important events. Firstly, the arrival of a new chairwoman at the head of the AMF, Marie-Anne Barbat-Layani. Secondly, the Paris market’s accession to 1st place in terms of market capitalization in Europe.

Numerous proposals

To begin with, the document sets out an ambitious work program, with cross-cutting themes on the one hand, and thematic priorities on the other.

The first cross-cutting priority focuses on the integrity and attractiveness of the Paris financial center, with a strong emphasis on the fight against money laundering, but also on increased education about sanctions.

The second axis relates to the AMF’s desire for greater international influence, in order to compensate for the absence of a single European supervisor for financial markets. The AMF seems to regret this absence, which is certainly welcome.

Balanced thematic priorities – perhaps too balanced?

In terms of thematic priorities, there are three: protecting investors, promoting more sustainable finance and supporting innovation.

With regard to sustainable finance, the AMF recognizes the complexity and inconsistencies of the regulatory framework and announces its intention to improve its coherence, which will not be an easy task… It also announces as a priority the guarantee of extra-financial information, which is also good news.

Indeed, the lack of reliability of such information handicaps the entire financial market value chain. From issuer to asset manager to individual investor.

The third priority concerns investor protection

Too timid?

This priority covers 3 main themes.

The first is to protect investors and stimulate their critical thinking. The AMF talks about its mystery visits, which are to be stepped up. That is a positive step, given that they are a good control tool. 

Unfortunately, little mention is made of financial education, which is mainly aimed at bank advisors. This is certainly necessary, but far from sufficient. Digital education is also mentioned, which is a good thing in an increasingly digitalized distribution world.

The AMF goes on to talk about technology watch and reinforcing the supervision of financial influencers.

The third part deals with quality-price issues, and in particular the level of charges for products sold and the quality of advice given. This section clearly shows the influence of the new European Retail Investment Strategy (RIS) mentioned in our blog on 8th June 2023. The notion of Value for Money confirms its importance.

It seems a pity to us that the AMF has not placed more emphasis on two important elements for the development of financial markets in France. On the one hand, financial education. This one is only mentioned and for which both the stakes and the means, with the arrival of new technologies, are considerable. Secondly, financial institutions need to know their customers and their risk profiles. This too needs to be improved in order to deliver better advice, something the AMF seems to be calling for.

To access the original publication on the AMF strategic guidelines for 2023 – 2027, click here.

L’article AMF strategic guidelines for 2023-2027 est apparu en premier sur Neuroprofiler.

The long-awaited legislative proposal for the Retail Investment Strategy (RIS) was published by the European Commission (EC) on May 24, 2023. This is a major proposal with far-reaching consequences, as it amends no less than 5 fundamental texts [1] relating to this world of retail investment.

The Commission presents this project as a major initiative to improve the framework and protection of retail investors. It also aims to strengthen their confidence and participation in the financial markets. In this way, they can contribute to the success of the Capital Markets Union project on which the EC has been working for years.

Numerous proposals

The EC’s draft legislation contains numerous points, which we will return to in subsequent articles.

It does not include a general ban on kickbacks, as many financial players feared. It does, however, propose a whole system based on the concept of Value For Money, which could have far-reaching consequences for the world of asset management.

The major disappointment, however, lies in the lack of ambition when it comes to financial education.

Financial education: a major absentee in the Retail Investment Strategy (RIS) proposal

Despite numerous statements on the subject, the European Commission’s legislative proposal for a Strategy for Retail Investment (RIS) does not include any major proposals on financial education.

In the context of the amendments to MiFID [2], the proposal says only two things. Firstly, Member States must promote financial education. Secondly, it succinctly differentiates between financial education and marketing material. The same applies to the IDD [3].

So, nothing very concrete or impactful.

A missed opportunity

It’s a pity that in a text presented as so fundamental and structuring, the European Commission accords so little importance to this theme.

How can we increase retail investor participation in the financial markets without increasing their understanding of them?

Studies on the lack of financial literacy among the French are regularly published. Without sufficient financial knowledge, how can you invest in the right conditions? How can we even understand the importance and stakes of financial savings in the life of an individual? Whether it’s financing your children’s education or preparing for your retirement.

Some might say that financial intermediaries are there to help organize these savings. But in its proposal, the European Commission itself cites a study [4] which shows that only 38% of those questioned consider that the investment advice they receive is really in their interests.

Yet the stakes are so high. On the one hand, the funded pension system is facing a major financial challenge. On the other, the financial challenges posed by the climate transition are considerable, and will require increased investment capacity that would be impossible to muster without the mobilization of individual investors.

This mobilization can have a real impact. In February and March respectively, the French opened 600,000 and 400,000 popular savings passbooks (Livrets d’Épargne Populaire).

A role for Europe?

Of course, levels of financial literacy differ from one European country to another. So do educational systems. What works in one country may not work in another.

Yet the ageing population and the climate challenge are indeed European challenges. The need to know the importance of financial savings and how financial products work applies to all Europeans.

Against this backdrop, it would be a good thing if Europe were to take a firmer hold of this issue. Rather than a system of benchmark prices for investment funds, which bears an unfortunate resemblance to price controls, why not impose a system of compulsory contributions by European financial establishments to real initiatives that have an impact on the financial education of European citizens?

In any case, at Neuroprofiler, we’ve started to take up the challenge of financial education with our fun course called EduProfiler.

Sources :

1. Omnibus proposition 230524-proposal-omnibus-directive_en.pdf (europa.eu)
2. MiFID II 32014L0065 – EN – EUR-Lex – European Union
3. IDD  32016L0097 – EN – EUR-Lex – European Union
4. Eurobarometer survey monitoring the level of financial literacy in the EU, 2023. The relevant question is Q12. “How confident are you that investment advice you receive from your bank/insurer/financial advisor is primarily in your best interest?”.

L’article The EU Retail Investment Strategy (RIS) is here est apparu en premier sur Neuroprofiler.

SFDR regulation

This regulation defines the reporting obligations for financial entities on both themselves and the products they distribute. On the latter, it has broken the investment funds in different categories. Reference is made to them together with the various articles of the regulations. Article 8 refers to products promoting environmental or social characteristics. Article 9 considers products that have sustainable investment as their objective.

Since its release, the SFDR regulation has acted as a major reference point for investors. They have perceived it as a quality label by these investors. This evolution has created two main issues:

• Firstly, there are already many labels for green funds existing in Europe. Between ISR, Finansol and Greenfin. France only has 3 different labels to qualify sustainable funds. There are more than 10 labels for sustainable funds across Europe. The new labeling created by SFDR has only added to the preexisting confusion.
• Secondly and more importantly, neither article 8 or article 9 sets specified criteria in terms of type of investments or types of companies in which the asset managers must invest.

AMF recommendations

This is what the recommendations of the AMF are looking into. The AMF suggests that the European Commission introduces minimum criteria.

The asset managers would have to follow these criteria for their funds to be compliant with article 8 or 9.

AMF talks about environmental criteria as a first step. These would need to be aligned with the taxonomy. It does not exclude adding other types of criteria later on. In addition, the investment process should be ESG compliant. The more restrictive approach for article 9 funds versus article 8 funds would remain. The article 9 classification would also exclude investment in fossil fuels.

The AMF recommendations obviously go in the right direction. In a way they are only catching up with the reality perceived by investors. But if amending the SFDR along the lines suggested by the AMF goes in the right direction, it is not enough. A single European label for green fund should emerge. It should include strict investment criteria. If not, the life of sustainable retail investors will remain difficult.

A perfect fit for the AMF recommendations

At Neuroprofiler, we take into account the AMF recommendations on SFDR. We make investors better understand sustainable finance through our financial education tool. We are also helping them to better define their real ESG objectives through our sustainability preferences profiling tool.

If you are looking for more information about our solutions, we are happy to answer your questions. Send us a message, and request a demonstration of our solutions directly.

L’article AMF recommendations on SFDR est apparu en premier sur Neuroprofiler.

Ineffectiveness of COPs

Since 1995, with a first edition in Berlin, 27 COPs have taken place. While the participants regularly welcome the agreements reached (including the Paris agreements in 2015), the concrete effect of these conferences on climate change is not as effective as we may think. Between 1995 and 2021, global greenhouse gas emissions increased by 58% and the holding of the various COPs does not seem to have influenced this trend.

As for previous agreements, their effectiveness is relative. For example, at the latest COP, the major  breakthrough was the creation of a “loss and damage” fund to help the  countries most vulnerable to climate change. From a symbolic point of view, this is an important step forward as it means that developed countries are acknowledging their responsibility in the climate crisis. However, from a practical point of view, the way this fund will be financed has still not been determined.

Finally, it is also possible to note that even after 27 conferences on climate change, there is still no agreement to phase down the use of fossil fuels, which is a major cause of greenhouse gas emissions and therefore of climate change.

The need to take action

In 2021, the concentration of CO2 in the atmosphere reached 414.7 parts per million (ppm), which is above the planetary boundary of 350 ppm. As a reminder, planetary boundaries are thresholds that must not be exceeded on a global scale in order for humanity to live in a safe ecosystem. On the nine global limits identified, six have already been exceeded with certainty in 2022 (one has not been quantified). They relate to climate change, biodiversity, disruption of biochemical cycles of nitrogen and phosphorus, land use change, chemical pollution and freshwater use.

Faced with this observation, the ineffectiveness of the COPs is all the more  frightening and many citizens wonder what they can do about it. Without hoping to solve the problem through individual actions (the causes of the problem are above all structural), it is common to want to “do one’s part”.  This raises the question of the global levers for action.

Finance as a lever for action

There are many ways to take action in the fight  against climate change. For example, you can start by taking five minutes to calculate your carbon footprint by answering the ADEME (The French Agency for Ecological Transition) questionnaire (nosgestesclimat.fr) and see what actions you can take. The average carbon footprint of French people is 10 tons per year per inhabitant. It should be reduced to 2 tons per year per inhabitant to comply with the Paris agreements.

However, as this type of questionnaire focuses on consumption habits, it is common to forget that it is also possible to have an impact through our investments. It is therefore advisable to find out about the companies in which our money is invested in order to favor those that have a positive impact on the environment, which is what we call sustainable finance.

At Neuroprofiler, we try to activate this lever by enabling financial institutions to better understand their clients’ ESG investment objectives. Thanks to our ESG questionnaire, we can assess investors’ ESG preferences in an accurate and user-friendly way. Our ESG preference assessment module complies with the latest published regulations while using all the levers of cognitive science to make this assessment accurate and fun.

L’article The 27th edition of the United Nations Climate Change Conference (COP27) est apparu en premier sur Neuroprofiler.

The fact that the ISSB tries to establish these standards at the international level threatens the more detailed European vision. However, it is the one we need if we want to truly evaluate the environmental performance of companies.

What does the concept of double materiality mean?

What is the position of the ISSB (International Sustainability Standards Board) on this subject, and why is this vision problematic?

In this article, we try to answer all of these questions.

What is materiality?

In accounting, materiality represents the rules for deciding whether and when a piece of information should be taken into account.

According to the current financial accounting system, information is considered material when it exceeds a “materiality threshold“.

Materiality threshold: “The point beyond which economic decisions or judgments based on the financial statements are likely to be influenced.”

In practice, it is often considered that “the decisions that the primary users of general purpose financial statements make on the basis of those financial statements” are those of investors, and in particular of shareholders, who choose whether or not to invest in the company according to its financial results. This view tends to neglect the importance and use of accounting documents by other stakeholders (government, employees, customers, etc).

In the context of ecological accounting (known as ESG), maintaining this view of materiality is particularly problematic. Indeed, some information that is important from an ecological point of view is not material from a financial accounting perspective.

For example, an increase in greenhouse gas emissions or in the number of work-related accidents in a large company will probably not have a material impact on the financial accounts of the company.

The introduction of the term “double materiality”

Faced with this conception of materiality, some European organizations, including EFRAG (European Financial Reporting Advisory Group), proposed to distinguish two types of materiality for environmental accounting:

• Financial materiality: “A sustainability topic is material from a financial perspective if it triggers financial effects on undertakings.”
• Impact materiality: “A sustainability topic or information is material from an impact perspective if the undertaking is connected to actual or potential significant impact on people or the environment and is related to the sustainability topic over the short, medium or long term.”

To differentiate these two concepts, we also speak of outside-in materiality for financial materiality and inside-out materiality for impact materiality.
This new concept makes it possible to take into account a greater number of environmental and social information. In addition, it ensures the non-negligence of certain important information in terms of impact for reasons of financial materiality.

SASB position

The SASB (Sustainability Accounting Standards Board) is a non-profit organization whose purpose is to develop sustainability accounting standards. The model followed is that of IASB (International Accounting Standards Board), the organization that developed the IFRS (International Financial Reporting Standards), which are widely used in Europe today.

In the same way that the IASB has done for financial accounting standards, one of SASB’s goals is to standardize sustainability accounting standards globally. That also includes standardizing the definition of materiality as they define it.

“SASB’s approach to materiality is based on traditional, financially oriented definition that is well accepted globally: information that is reasonably likely to be important in making investment decisions.”

In the interest of simplification and standardization, SASB supports the use of a definition of materiality that is identical for financial and non-financial accounting and equivalent to that already used in financial accounting today.

NB : Since June 2022, SASB is part of the ISSB (International Sustainability Standards Board). It is an organization that combines several previously existing organizations (SASB, IRRC, CDSB).

Europe’s position towards double materiality

Europe’s position is favorable to the use of the concept of double materiality, as we can see in the legal texts relating to the publication of extra-financial information by companies. Especially, the CSRD takes up the concept of double materiality previously introduced in the NFRD (Non Financial Reporting Directive).

“The NFRD introduced a requirement for companies to report both on how sustainability issues affect their performance, position and development (the ‘outside-in’ perspective), and on their impact on people and the environment (the ‘inside-out’ perspective). This is often known as ‘double materiality’.”

Conclusion

The definition of materiality is a crucial issue for ESG accounting. Not taking into account double materiality means ignoring a large part of the environmental performance of companies. In Europe, legislation is moving in the right direction, but at the international level, the IASB does not seem to support this practice. Furthermore, it wants to impose standards based solely on a more traditional financial materiality.

L’article Double materiality and environmental accounting est apparu en premier sur Neuroprofiler.

With a new President and Director General in place, ESMA could not disappoint with this programme.

The least we can say is that this latest one is not a complete break with the previous one…which seems quite logical as ESMA’s mandate has not undergone any significant transformation in the last year. However, its powers and resources continue to expand and so does its work programme.

The new focus on data processing seems very relevant and will undoubtedly be welcomed by all financial market participants, especially those who are constantly faced with new reporting obligations.

In the field of retail investor protection, which is of particular interest to Neuroprofiler, there is no revolution. 

ESMA certainly aims for greater engagement with the latter and sets out a number of priorities.

• ensure access to clear, reliable and understandable information by reducing the size and complexity of the information and simplifying the product documentation
• contribute to the implementation of product labels simplifying the choice for these investors
• increase the use of consumer testing when implementing new policies or regulations. 

There is also a point that will make some people smile: focus on the cost and quality of investment advice by ensuring the quality of training of investment advisers.

Does this mean that the shoemakers children are not the worst shod?

At Neuroprofiler, we strongly believe that the training for investors but also for advisors who interact with these investors is absolutely crucial.  

Particularly in countries with a tradition of universal banking, such as France, the task of the advisor is made particularly difficult by the number and heterogeneity of the products he or she must sell. Moreover, as bank distribution networks are under strong deflationary pressure on their operating costs due to the low interest rates until recently and the importance of IT investments, the training of bank advisers seems to have been left somewhat to the side. 

Beyond the training of advisers, it is also the training of clients that is fundamental. In this area, ESMA’s programme remains more discreet.  It is clear that this is a complicated area where the interaction between a European agency and national supervisory authorities closer to the end customers can still be optimised.

Given the desperate need for advisor and client education, and the timidity of the European Financial Services Authority’s programme, we at Neuroprofiler believe that our new financial education module, EduProfiler, is very timely.

L’article ESMA’s work programme and its objectives est apparu en premier sur Neuroprofiler.

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 InvestProfiler, we will strive to remain at the forefront of innovation.

L’article Assessing clients’ ESG preferences, a new technological challenge est apparu en premier sur Neuroprofiler.

Last August, the assessment of retail investors’ sustainability preferences became mandatory for all European financial institutions providing advisory or portfolio management services. 

This new regulation applies under IDD and MiFID.

The regulator defines sustainable investment as a financial instrument that meets at least one of the three criteria below:

1. a financial instrument which is invested in environmentally sustainable investments, as defined in Article 2(1) of Regulation (EU) 2020/852 of the European Parliament and of the Council, in a minimum proportion determined by the client or potential client;
2. a financial instrument which is invested in sustainable investments within the meaning of Article 2(17) of Regulation (EU) 2019/2088 of the European Parliament and of the Council, in a minimum proportion determined by the client or potential client;
3. a financial instrument that addresses the main negative impacts on sustainability factors, with the qualitative or quantitative evidence being determined by the client or potential client.

The publication of guidelines to support financial institutions in the complex implementation of sustainability preferences assessment

This new directive raises many implementation issues. 

First, the ESG offer is still limited, and not well aligned with the strict requirements of the European taxonomy. ESG information is still not widely available. Finally, taking into account both the financial and extra-financial preferences of clients when recommending products is challenging traditional advisory processes from both a human and an IT perspective.

To assist financial institutions in this delicate implementation, the European regulators European Securities and Markets Authority (ESMA) and European Insurance and Occupational Pensions Authority (EIOPA) have published guidance documents for the banking (23rd of September) and insurance (20th of July) sectors.

The guidelines are complemented by a report on the feedback from the various stakeholders to the public consultation on the draft guidelines on integrating customer preferences for sustainability.

The following is a summary of the main points of the two guidelines.

ESMA and EIOPA guidelines on assessing sustainability preferences

Recognition of the difficulty of implementing this new regulation

The guidelines first recognise that the implementation of the new ESG regulation is challenging given the different deadlines of other regulations and the lack of ESG data.

However, they do not give much more flexibility to financial institutions, which will have to make their “best efforts” to implement the directive in the medium term.

More education

In addition, the guidelines are much clearer than in their first version. 

The EIOPA guidelines are illustrated in particular by tables and graphs. The terms and formulations are less ambiguous and more pragmatic. This is particularly the case for the definitions of points a, b and c.

• EU Taxonomy: is a classification system that lists environmentally sustainable economic activities. The Taxonomy does not list socially sustainable economic activities. Sustainable investments with an environmental objective may or may not be aligned with the Taxonomy.
• Sustainable investment: an investment in an economic activity that contributes to an environmental or social objective, provided that the investment does not significantly undermine another environmental or social objective and that the investee companies follow good governance practices.
• Main negative impacts: These are significant negative impacts on sustainability factors related to environmental and social issues (employees, respect for human rights, anti-corruption, etc.).

More flexibility on implementation times

Recognising the various issues surrounding the implementation of these new regulations, the ESMA, in its publication of 23rd of September, postpones the application date by 6 months from the date of the publication of its translated versions, a period initially set at 2 months.

Furthermore, the ESMA advises financial institutions to “actively” collect ESG preferences from all their clients within the 12 months after the directive implementation.

More financial education for customers

Furthermore, the ESMA stresses the importance of financial education for advisors and retail investors on these new topics of sustainable investment, but also on the mechanisms of financial products more broadly. 

They mentioned that this will be a priority in the coming years for European regulators.

More flexibility on the positioning of the questionnaire on sustainable investment preferences

In the first draft of the ESMA and EIOPA guidelines, it was recommended that the section on the assessment of sustainability preferences be placed at the end of the suitability questionnaires. The new guidelines provide more flexibility.

For the purposes of assessing suitability, it is important for insurers and insurance intermediaries to obtain information on sustainability preferences during the collection of information on investment objectives; this information may be collected as the last element of the collection of information on investment objectives. However, in the latter case, this should not prevent the client, on his own initiative, from mentioning his sustainability preferences in an earlier part of the information gathering.

Guidelines on the integration of sustainability preferences in the assessment of suitability under the Insurance Distribution Directive (IDD), July 2022.

More flexibility on the collection of key negative impacts

In the EIOPA guidance, a categorisation of the main negative impacts is clearly suggested: environment, employee issues, human rights, anti-corruption and anti-bribery issues.

This was not the case in the first ESMA/EIOPA draft guidelines.

However, ESMA points out that this type of list is just a suggestion and that financial institutions are free to define others.

Furthermore, the EIOPA and ESMA directives were contradictory on the need to collect information on PAIs that the client wishes to consider in a quantitative AND (EIOPA) or OR (ESMA) qualitative manner. 

The ESMA’s guidelines clarify this point by giving the flexibility to capture these PAIs in a quantitative OR in a qualitative manner.  

Process where the client has ESG preferences, but does not wish to give further details

The EIOPA guidelines also provide further information on the situation where clients state that they have ESG preferences, but are not willing to provide more details on their appetite for a, b or c.

This can be quite common as clients may be reluctant to answer a long questionnaire assessing their ESG preferences using technical terms such as taxonomy, PAI, SFDR… after a suitability questionnaire which is already quite long and laborious.

In this case, according to the EIOPA guide, the financial institution should ask additional questions to the customer to verify that he/she really does not have any specific preference regarding points a), b) or c).

If the client maintains his or her position, the financial institution may still recommend a product whose sustainability characteristics best match the client’s preferences, taking into account the sustainability preferences as expressed by the client in general terms.

The ESMA is more vague on the subject, suggesting only that a process should be in place for such situations.

Process when no product meets the customer’s sustainability preferences

Given the challenges mentioned above, it is very common that no product exactly matches the customer’s sustainability preferences.

This will be particularly the case in relation to taxonomy alignment, where many customers may wish to have high taxonomy alignment, whereas products currently available on the market often have a maximum alignment of 20%.

Previously, the guidelines required to reassess the client’s ESG preferences if no suitable ESG product was found. Given the very high number of possible combinations of a, b and c, this would have meant answering the questionnaires a large number of times until finding the right document.

In their guidelines, the EIOPA and ESMA take a more pragmatic approach. The financial institution will have the opportunity to show clients the most suitable ESG product, and to ask them if they are willing to change their ESG preferences to invest in this product or not.

Conclusion

The two guidelines, although more pedagogical than their consultation version, do not make major changes to the original texts. 

Well aware of the difficulties of implementing this new MiFIDII and IDD regulation, regulators nevertheless do not seem ready to make the assessment of sustainability preferences less granular or more tailored to the reality of the current ESG offering.

L’article ESMA guidance sustainability preferences assessment est apparu en premier sur Neuroprofiler.

Asking investors about their preferences for sustainable investing has become part of the routine for financial advisors and asset managers since the 2nd of August.

This new rule will apply under Insurance Distribution Directive (IDD) and under Markets in Financial Instruments Directive (MiFID) (see related  Delegated Regulation). This means it will apply both for banks, wealth management companies and insurance companies.

How to define a sustainable investment?

The regulator defines the notion of sustainable investment as a financial instrument which is aligned with at least one of the three criteria below:

1. a financial instrument that is invested in environmentally sustainable investments, as defined in Article 2(1) of Regulation (EU) 2020/852 of the European Parliament and f the Council, in a minimum proportion determined by the client or potential client
2. a financial instrument which is invested in sustainable investments within the meaning of Article 2(17) of Regulation (EU) 2019/2088 of the European Parliament and the Council in a minimum proportion determined by the client or potential client
3. a financial instrument that addresses key adverse impacts on sustainability factors, with the qualitative or quantitative elements that demonstrate this being determined by the client or potential client.

Documents published by the authorities

On the 27th of January 2022, the European Securities and Markets Authority (ESMA) published a consultation paper to propose guidelines on how to incorporate sustainability preferences assessment in the client suitability process. The consultation closed on 27 April 2022 and the final report is expected for Q3 2022.

On the 13th of April 2022, the European Insurance and Occupational Pensions Authority (EIOPA) similarly launched a public consultation on draft “Guidelines on integrating the customer’s sustainability preferences”. The submission deadline was on the 13th of May 2022.

On the 20th of July 2022, the European Insurance and Occupational Pensions Authority (EIOPA) published a guidance on this subject and decided to pause its work on Guidelines on the topic of sustainability preferences in order to gather more information based on the implementation experience with the new legislative framework.

The guidance is complemented by a feedback statement, which addresses the comments received from stakeholders in the public consultation on draft Guidelines on integrating the customer’s sustainability preferences. 

Challenges regarding the implementation of the assessment of sustainability preferences

This publication was particularly expected since the implementation of this regulation raises many challenges.

Challenge 1: Lack of data about products

Data about the points a, b and c (Taxonomy, Principal Adverse Impacts…) will be available only in January 2023 for most products.

This means that, before this date, the matching between products and the client’s ESG profile will be difficult. In many cases, clients will have to modify their sustainable preferences to be allowed to invest.

Challenge 2: Limited ESG offer

For many financial institutions, the ESG offer is still limited to Article 8 products (products with a moderate ESG impact). They do not have products aligned with the taxonomy. If they have, the percentage of alignment is often limited to 5%-20%.

Since the assessment of sustainability preferences should be “unbiased” as specified many times in the guidelines, many clients may not be aware of the market situation and may want a very high alignment to the Taxonomy (80% and more).

This means, again, that, most of the time, no suitable products will be found and clients will have to modify their sustainability preferences to be allowed to invest. This may generate frustrations and deter clients from investing in ESG products in the future.

Challenge 3: Impact on the process of the financial institutions

The addition of the assessment of sustainability preferences will have a strong impact on the IT and compliance processes of financial institutions. The current matching process is often based on one single dimension (risk), while this new regulation implies to implement a multi-criteria matching (risk, taxonomy and SFDR alignment, PAI).

Challenge 4: Financial education of clients and advisors

Finally, the level of financial literacy regarding sustainable investments is very low both among clients and advisors. The new regulation is very technical, using complex terms like taxonomy, SFDR, Principal Adverse Impacts… with complex underlying definitions.

Challenge 5: Lack of clarity of the text and previous guidelines

Finally, on top of the inherent complexity of the regulation, some concepts and processes were not clearly defined and sometimes contradictory from the ESMA to the EIOPA version (ex: inclusion of Taxonomy aligned products in SFDR aligned products, qualitative or quantitative elements which should be gathered for each PAI…).

What do the new EIOPA guidelines imply?

The new guidelines are not fundamentally different from the draft published in Spring. We summarize below the main differences.

More educational guidance

First, the guidance is much clearer than the first version of the EIOPA guidelines. It is illustrated by useful charts and graphs. Terms and wordings are less ambiguous and more pragmatic. This is especially the case for the definitions of points a, b and c.

EU Taxonomy: is a classification system which establishes a list of environmentally sustainable economic activities. That Regulation does not lay down a list of socially sustainable economic activities. Sustainable investments with an environmental objective might be aligned with the Taxonomy or not.

Sustainable investment: means an investment in an economic activity that contributes to an environmental or social objective, provided that the investment does not significantly harm any environmental or social objective and that the investee companies follow good governance practices.

Principal adverse impacts: are the most significant negative impacts of investment decisions on sustainability factors relating to environmental, social and employee matters, respect for human rights, anti-corruption and anti-bribery matters.

Acknowledgment of the difficulties to implement the new regulation

Second, the guidance recognizes that the implementation of the regulation is tricky given the different deadlines of the regulations. They however do not give much more flexibility to financial institutions, which will have to make their “best efforts” to implement the regulation in August, even if product data is not yet fully available.

Important regulatory initiatives are still ongoing to identify and properly disclose investments in sustainable economic activities, including under the EU Taxonomy. These disclosures are crucial for insurers and insurance intermediaries to assess whether the products offered match the sustainability preferences of customers.

Some of the rules are not yet finalised and the implementation of these initiatives do not converge at the same points in time, in particular the application date of the new legislation under the IDD precedes the deadlines for reporting of company data under the Corporate Sustainability Reporting Directive and of the application of the Delegated Regulation supplementing the Sustainable Finance Disclosure Regulation.

As a result, insurers and insurance intermediaries need to responsibly disclose on sustainability, based on the data currently available and make best efforts to ensure good data quality.

Guidance on the integration of sustainability preferences in the suitability assessment under the Insurance Distribution Directive (IDD), July 2022

More flexibility regarding the position of the section about sustainability preferences assessment

In both ESMA and EIOPA first draft guidelines, it was recommended to position the section about the assessment of sustainability preferences at the end of the suitability questionnaires. The new guidance gives more flexibility.

For the purpose of a suitability assessment, it is important that insurers and insurance intermediaries obtain information on sustainability preferences in the course of the collection of information on investment objectives and this may be collected as the last element within the collection of information on investment objectives.

However, in the latter case, this should not prevent the customer, at his/her own initiative, from bringing up their sustainability preferences in an earlier part of the information collection.

Guidance on the integration of sustainability preferences in the suitability assessment under the Insurance Distribution Directive (IDD), July 2022

List of Principal Adverse Impacts

Moreover, a categorization of Principal Adverse Impacts is clearly suggested: environment, employee matters, respect for human rights, anti-corruption and antibribery matters. It was not the case in the first ESMA/EIOPA draft guidelines.

Process when a client has sustainability preferences, but does not want to share his/her preferences

The guidance gives more details on the situation where clients share they have ESG preferences, but are not willing to give more details about their appetence for a, b or c.

This situation may be quite common since clients may be reluctant to take a long questionnaires assessing their ESG preferences using technical terms like taxonomy, PAI, SFDR… after a suitability questionnaire which already quite long and laborious.

In this case, the insurer should ask additional questions to the client to check he/she has really no specific preference regarding points a), b) or c). If the client maintains his/her position, the insurer or insurance intermediary can still recommend an IBIP that has sustainability features matching the customer’s preferences as best as possible, taking into account the sustainability preferences as expressed by the customer in general terms.

In that case, the insurers and insurance intermediaries should record in a suitability statement:

1. A description of the customer’s sustainability preferences, even if in broad or general terms;
2. The fact that even though the customer has sustainability preferences, he/she has not specified a preference with regard to any aspect(s); and
3. If a personal recommendation of an IBIP is made based on the customer’s sustainability preferences, the reasons underlying that personal recommendation.

Process when no products match the client’s sustainability preferences

Given the challenges mentioned earlier, it will be very common that no products match the exact sustainability preferences of the client.

This will be especially the case regarding the alignment to the Taxonomy, where many clients may want to have a high alignment to the Taxonomy, while current available products on the market often have a maximum alignment of 20%.

Previously, the guidelines were asking to the financial institutions to make the clients retake the questionnaire to adapt their sustainability preferences. Given the very high number of possible combinations of a, b and c, this would have implied to take the questionnaires a lot of times until finding the exact combination corresponding to products available at the financial institution.

In this guidance, the EIOPA adopts a more pragmatic approach. The financial institution will have the option to show to the clients the products which the highest alignment with their ESG preferences, and ask them if they are open to modify them in order to invest.

What happens if the product invested in does not match the customer’s sustainability preferences including due a change in the customer’s sustainability preferences?

The insurer or insurance intermediary should:

1. Inform the customer;
2. Evaluate the impact of this change;
3. Inform the customer in an updated suitability report, and
4. Make a new recommendation where required by national rules or where it provided for under the contract.

(…) When a customer decides to adapt its preferences, the insurer or insurance intermediary could for example disclose to the customer information about the products integrating sustainability preferences that are the closest to the preferences expressed by the customer available in the market and/or by the insurer or insurance intermediary providing the advice.

How does this guidance impact the Neuroprofiler InvestProfiler?

Neuroprofiler has adapted its ESGprofiler accordingly.

The InvestProfiler is an investment game based on behavioral finance which assesses client’s sustainability preferences in an interactive and educational way, in line with the new European regulations

L’article EIOPA guidance about the assessment of sustainable preferences est apparu en premier sur Neuroprofiler.

L’article MiFID 2: Turn a regulatory constraint into a business opportunity est apparu en premier sur Neuroprofiler.