ESG criteria: how to design products that meet customer expectations?

In recent years, responsible investment has grown so much that it has become difficult for management companies not to include ESG criteria in their investment policy. But between environmental, social and governance requirements, which investors favour ones? Do they prefer to act to limit global warming or to protect biodiversity? Are they more sensitive to preserving marine resources or to the circular economy and the defence of minorities?

In a regulatory environment that is increasingly vigilant about respecting investor preferences, asset managers have a crucial role in designing products tailored to their client’s expectations. Here are some explanations.

Responsible investment: a sustainable and growing trend

ESG products have become increasingly popular in recent years. Between 2015 and 2020, the total volume of sustainable bond issuance in Europe increased 18-fold, from €26 billion at the end of 2015 to €476 billion in 2020.

This trend was accelerated mainly by the Covid crisis. EFAMA, the European asset management association, reports an increase in sustainable bond assets to EUR 707 billion in the first 10 months of 2021[1] .

Indeed, the fiscal policy response to the Covid-19 pandemic has led to a significant increase in green bond issuance, which has further increased the liquidity and depth of the market, making it more attractive to investors. In addition, more and more assets managed under dedicated mandates for institutional investors are also subject to extra-financial approaches.

Thus, ethical considerations are increasingly replaced by financial arguments to promote the sale of ESG products. The most virtuous companies in terms of ESG have indeed performed better during the health crisis. More generally, taking extra-financial risks into account would help limit losses during emergencies.

More and more individuals are turning to responsible investment to make sense of their investments, where institutional investors have already led the way. To meet this growing demand, asset managers face a significant regulatory challenge.

Asset management: a restrictive regulatory framework

The European regulation on the assessment of sustainability preferences under MiFDII, a first guidance document published last January, requires fund managers to provide exact information on financial products (alignment with the taxonomy, PAI, alignment with the SFDR definition of sustainable finance…).

This information is currently complicated to obtain (e.g., assessing a company’s impact on biodiversity or the circular economy).

The second challenge will be to create ESG products in line with the sustainability preferences of customers collected under the new regulation.

Indeed, if we stick to the current ESMA guidelines, a client could require a level of taxonomy alignment of 100%. Today, it is challenging to find ESG products with more than 20%…

Thus, the challenge for fund managers is not to seek out exotic investor appetites but to design products that fit the regulatory framework.

The problem is that while the regulations on ESG products, which are full of technical terms that are incomprehensible to the average person, do not allow for any freedom in the topics to be addressed, the fact remains that investors’ expectations are focused on specific and varied subjects.

The appetite for ESG products is there, but the offer must be intelligible and accessible. Therefore, the challenge for asset managers is to reconcile investor expectations with the existing MiFID II compliant product offering. In short, it is about reconciling regulatory compliance with the marketing and psychological understanding of clients. To do this, asset managers need to rely on appropriate tools.

ESGprofiler: a tool to make it fun to capture ESG preferences and then sell the right financial products

To survive in the current environment, asset managers need to:

  • Capture ESG preferences by MiFID II regulations without making the questionnaire indigestible for potential investors
  • Linking investor preferences with ESG products available on the market, free from the complexity imposed by regulation

To address this issue, the start-up Neuroprofiler has developed an ESGprofiler. This unique tool, based on the principles of gamification and behavioural finance, allows you to survey the ESG expectations of your end clients to help you match existing ESG products with their preferences. By using ESGprofiler, asset managers will be able to support better their institutional clients, who will be able to sell better and more to their end clients. Want to know more? Request a demo!

[1] https://www.efama.org/sites/default/files/files/Asset%20Management%20Report%202021_4.pdf