Sustainability preferences: the limit of self-assessment

A growing appetite for sustainability

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.

A new legal context for sustainable financial products

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 and include these preferences in their investment strategy.

To do so, the European Securities and Markets Authority (ESMA) published in January 2022 a first draft of guidelines to help financial firms implement this new requirement. This document will be a complement to the guidelines on client suitability assessment published in 2018.

The 2018 guidelines were mainly focused on the use of behavioral finance and the avoidance of self-assessment to reduce cognitive bias when assessing client’s suitability.

Avoiding self-assessment

Firms should take reasonable steps and have appropriate tools to ensure that the information collected about their clients is reliable and consistent, without unduly relying on clients’ self-assessment.

on certain aspects of the MiFID II suitability requirements, ESMA, 2018

The 2018 guidelines provide arguments on why direct explicit questions like “Do you know the mechanisms of shares?” or “What is your ideal risk/return?” will fail to capture the true client’s experience and preferences. Self-assessment should be avoided, more specifically for the assessment of risk perception and financial knowledge.

When assessing the risk tolerance of their clients through a questionnaire, firms should not only investigate the desirable risk-return characteristics of future investments but they should also take into account the client’s risk perception. To this end, whilst self-assessment for the risk tolerance should be avoided, explicit questions on the clients’ personal choices in case of risk uncertainty could be presented. Furthermore, firms could for example make use of graphs, specific percentages or concrete figures when asking the client how he would react when the value of his portfolio decreases

on certain aspects of the MiFID II suitability requirements, ESMA, 2018

The adoption by firms of mechanisms to avoid self-assessment and ensure the consistency of the answers provided by the client is particularly important for the correct assessment of the client’s knowledge and experience

on certain aspects of the MiFID II suitability requirements, ESMA, 2018

Integrating behavioral finance principles

On top of avoiding self-assessment, the ESMA recommends in the 2018 guidelines to incorporate the outcomes of behavioral finance to reduce client’s cognitive biases.

Traditional finance models are based on the assumption according to which the economic agents are rational. This means (inter alia) they are able to process relevant information in an efficient and unbiased way and that their decisions are consistent with utility maximization. Various studies and some market failures have nonetheless demonstrated that investors, or at least a significant number of them, are subject to heuristics and behavioural biases. This means that investors are very susceptible to how certain choices are presented to them. In many situations, their financial decisions are therefore at least partially influenced by non-relevant aspect from the decision context, which might lead to sub-optimal outcomes for them. 3 Evidence of these biases have typically been identified as coming from cognitive psychology literature and have then been applied in the financial context

Consultation on Guidelines
on certain aspects of the MiFID II suitability requirements, ESMA, 2018

In particular, the suitability assessment may be ineffective if it does not take into account clients’ behavioural biases: if the way questions are formulated does not consider those cognitive and behavioural biases (which could affect preferences and choices), the questionnaire may result to be unreliable. At the same time, the questionnaire itself ought to be unbiased: questions must be formed to prevent any perceptive or cognitive distortion from impairing the answers and affecting their validity and reliability.

Consultation on Guidelines
on certain aspects of the MiFID II suitability requirements, ESMA, 2018

The majority of respondents to the 2018 guidelines welcomed this initiative to take into account research on behavioural finance in the client suitability assessment process. In particular, the Securities and Markets Stakeholders Group (SMSG) has been an active supporter of the use of behavioral finance to enhance investor protection in these guidelines, as well as in other responses to ESMA consultations related to investor protection.

References to insights of behavioural economics and the insertion of a correlation table are much appreciated.

Response to ESMA’s Consultation Paper on “Guidelines on certain aspects of the MiFID II suitability requirements”, 2017

Self-assessment and sustainability preferences

As mentioned in introduction, in January 2022, the ESMA published guidelines to help financial institutions implement changes in the MiFIDII regulation regarding the assessment of sustainability preferences.

Surprisingly, contrary to the behavioral approach strongly promoted in the previous guidelines, the regulator recommends to rely on self-assessment to capture ESG preferences.

It should be noted that, in reflecting the legislative text, the approach suggested for gathering information from clients on their sustainability preferences is substantially based on self-assessment. This is different from the approach that firms are expected to adopt when collecting information on the ‘traditional’ parameters of suitability assessment. Firms are reminded that the existing ESMA guidelines focusing on the measures to be adopted to limit the risks of self-assessment remain confirmed and are not in any way impacted by the new guidance on collecting information on clients’ sustainability preferences

Guidelines on certain aspects of the MiFID II suitability requirements, January 2022

This recommendation is in contradiction to both recommendations from stakeholders like the Securities and Markets Stakeholder Group (SMSG) and from academic research.

Contradictions to the SMSG recommendations

In another consultation, the SMSG published recommendations to foster behavioral finance in the KYC process to fight against cognitive biases.

Based on further literature on behavioural finance, several ideas may be explored around a stricter enforcement of the know-your-customer principle, where documentation may be combined with tests (more or less thorough, using psychological insights, possibly determined in liaison with supervisory authorities) which would reveal the real knowledge bias and the real risk aversion of clients.

SMSG response to ESMA on its Call for evidence on the EC mandate on certain
aspects relating to retail investor protection, January 2022

Contradictions to academic research in psychology and behavioral finance

The assessment of investment preferences is prone to many cognitive biases.

Academic research show that self-assessment questionnaires do not permit to capture client’s true preferences and expertise. This kind of questionnaires are indeed prone to many cognitive biases.

As mentioned in the ESMA 2018 guidelines, this is the case for risk preferences (risk aversion bias) and financial knowledge (overconfidence bias). But this is also (and even more) the case for sustainability preferences.

The assessment of sustainability preferences are prone to many biases such as motivation bias, anchoring effect, confirmation bias, judgmental heuristics, social desirability,…

Some of these biases may be conscious (explicit bias). For instance, a male client may be uncomfortable to share with his advisor that he cares about the environment and will consciously lies about his preferences to be more in line with what is socially expected from him (see studies by Brough and al.). Other biases affecting sustainability preferences may be implicit as described below.

It is thus surprising to find in the ESMA guidelines that self-assessment should be avoided for risk preferences and financial knowmedge assessment, but not for sustainability preferences assessment.

Implicit bias strongly influence our social and environmental beliefs

The question of sustainability is indeed very subjective and even controversial.

With the new MiFIDII changes, retail clients will be asked to share intimate preferences and beliefs on diversity, nuclear power, weapons or climate change. Based on academic literature in psychology and behavioral finance, capturing such sensitive information will be probably even more prone to cognitive biases than for the assessment of risk preferences.

Research on “implicit bias” suggests that people can act on the basis of prejudice and stereotypes without intending to do so. As opposed to explicit bias, which can consist in conscient beliefs or preferences, implicit bias often consists of unconscious tacit attitudes and preferences. Even the most well-meaning and conscientious investors have implicit biases.

These implicit biases are especially strong regarding the social or environmental beliefs and values.

Implicit bias and sustainability preference assessment

For instance, academic studies have shown that implicit biases can strongly influence our perception of gender diversity, circular economy or recycling which are part of the European Taxonomy or considered as Principal Adverse Impacts (PAI) by the European Commission (see references below).

Cognitive psychology studies in this field show important differences between explicit biases (captured through self-assessment questionnaires) and implicit biases (captured through psychometric tools). Captured implicit biases are more predictive of the actual behavior of consumers than assessed explicit biases, showing that self-assessment questionnaires are particularly ineffective to capture consumer’s true preferences regarding social and environmental matters.

Implicit biases affect not only the investors, but also the advisors.

For instance, Brough at al. showed a strong Green-Feminine Stereotype in their research. It means that eco-friendly behavior, such as investing in sustainable funds, are perceived as “unmanly”.

This may imply that advisors will recommend more ESG investments to women than to men (unconsciously or not).

Neuroprofiler response to the ESMA consultation

Based on this academic research, our suggestion to the ESMA will be to apply for sustainability preferences assessment the same recommendations formulated in the 2018 guidelines for risk preferences assessment:

  • Avoid the use of self-assessment
  • Use of a behavioral economic or psychometric approach
  • If possible, promote the fact that the client takes the suitability questionnaire in autonomy, without the help of an advisor or a relative

Such recommendations will strongly help reducing cognitive biases influencing the assessment sustainability preferences, which should be again much stronger than for the assessment of risk preferences given the subjective and sometimes controversial dimension of social and environmental values.


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Brough, A., Wilkie, J.E, Ma, J., Isaac, M.S, Gal, D., (2016). Is Eco-Friendly Unmanly? The Green-Feminine Stereotype and Its Effect on Sustainable Consumption. Journal of Consumer Research, 43:4, 567-82.

Brough, A., (2017). Men Resist Green Behavior as Un-Manly: A Surprising Reason for Resistance to Environmental Goods and Habits. Scientific American *

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