The growth of SRI, or socially responsible investment, is closely linked to European regulations, which are gradually shaping its contours. The MiFID2 law and the obligation to collect investors’ ESG preferences in the suitability questionnaire are the latest stones in a building still under construction. Here is a look at the key regulatory steps in terms of SRI.
SFDR: how regulation has gradually structured sustainable investment
Although the origins of SRI date back to the beginning of the 20th century, it is only in the 21st century that sustainable finance has taken on its whole dimension. Concerned about climate issues, public opinion has taken up the theme to give it an increasingly important place in investment portfolios, in line with the Paris Agreement. ESG criteria have been created, and a series of texts have gradually come to govern SRI to protect investors from any attempt at greenwashing.
In 2018, the European Commission issued an action plan to finance sustainable growth in this sense, with the following three main areas:
- Redirecting capital flows to sustainable investments to achieve sustainable and inclusive development;
- Managing the financial risks of climate change, resource depletion, environmental degradation, and social issues;
- Promote transparency and a long-term vision in economic and financial activities.
In this document, the EU notes that the lack of clarity regarding sustainable investment is a barrier to SRI among investors. The European Commission insists on the importance of increased transparency to allow citizens to compare the performance of companies in terms of sustainability and invest with full knowledge of the facts.
This is the whole point of the European regulation (EU) 2019/2088 known as “Sustainable Finance Disclosure (SFDR),” applicable since March 10, 2021, which requires management companies to classify financial products according to their environmental and social impact. The SFDR has thus introduced three main categories of products:
- Dark green: so-called “Article 9” products whose objective is a sustainable investment, i.e., investment in economic activities that contribute to an environmental or social objective
- Light green: “Section 8” products that promote environmental or social attributes as part of their overall investment strategy
- Grey: so-called “Article 6” products that either consider ESG risks part of their investment process or are explicitly declared unsustainable.
This labeling of investment funds according to their level of sustainability must be reflected in all documents and reports of management companies to accompany the development of SRI in all transparency.
MiFID 2: the text that established the obligation to collect ESG preferences
In 2020, the European Commission published a new draft regulation intended to amend the MiFID II delegated regulation. Launched in the 2008 financial crisis, MiFID aims to protect investors further. In this sense, this new version of the text provides the obligation to consider the environmental, social, and governance (ESG) preferences of investors when assessing suitability in investment advice and portfolio management.
As of August 2, 2022, investment firms will have to assess investors’ potential sustainability preferences by asking them about their ESG preferences. According to the regulation’s text, ESG represents a client’s or potential client’s choice regarding the integration of sustainable investments into their investment strategy. How to comply with the new regulation?
How do you collect investors’ ESG preferences in a compliant manner?
Incorporating ESG preferences requires modifications to the profiling questionnaires to collect the necessary sustainability information without hindering other assessment parameters. For example, the relationship between risk profiling procedures and client ESG preferences needs to be examined to determine how they may interact in defining financial risk profiles.
The regulation states: “To avoid any mismatch, investment firms providing advice should assess the investor’s investment objectives, time horizon, and circumstances before asking the client about potential ESG preferences.
In other words, information on ESG preferences, after financial information, should not interact in determining the client’s overall risk profile. Instead, it should be used to identify the client’s characteristics and needs in the context of their investments.
In short, to be in order, the suitability test must make it possible to define the ESG strategy desired by the investor precisely. The questionnaire should help the investor formalize his preferences and identify the trade-offs he is willing to accept. It should be exhaustive without being boring because the length of the suitability test will inevitably impact the sale of financial products! This is why it is highly recommended to turn to a fun and compliant solution to collect the ESG preferences of your clients.
InvestProfiler: Neuroprofiler’s tool to assess investors’ ESG preferences
InvestProfiler is a fun, adaptive questionnaire specifically designed to capture investors’ ESG preferences. It uses powerful behavioral finance algorithms to determine the sustainability impact investors are looking for. Once the information has been accurately collected, the tool suggests financial products perfectly in line with their requirements. The use of ESGprofiler is a way to comply with the MiFIDII directive and its recommendations while meeting investors’ aspirations for more sustainable finance.
Equipping yourself with the InvestProfiler today guarantees strict compliance with European regulations while putting the needs of investors first to sell them more financial products. Request a demo now!