New EU Regulations: Great Opportunity for Sustainable Investing
The share of sustainable investments has grown exponentially in the last three years – especially among institutional investors. Although private clients are also increasingly showing interest in this segment, the full potential is still far from being fully realized. But that could change soon.
The EU’s Action Plan on Sustainable Finance is focused on promoting sustainable finance and driving investments towards a low-carbon economy. In August 2022, the next phase of the Action Plan comes into force, which focuses on distributors through changes in the Financial Markets Directive (MiFID II). These developments will have a far-reaching impact on the private banking industry in the coming years.
Lack of Transparency and Knowledge
Studies show that there are two main reasons for the reluctance seen among private clients when it comes to sustainable investments: lack of transparency about the sustainability of investments and a lack of knowledge about the sustainable investment strategies available on the market.
The update of the MiFID II directive directly addresses this challenge. Starting in August, it will be necessary to actively ask clients across Europe about their interest in sustainable investments. Based on their answer, wealth managers will at the same time be legally obliged and in a better position to explain the corresponding offering to their clients. This will lead to an increase in sustainable investments.
But the directive also addresses several other challenges in sustainable investing. Why? Because the demands of private clients are especially exacting, and therefore private clients have the potential to increase the quality of sustainable investment products on the market and drive innovation.
Curbing Greenwashing: Convincing Strategies
First and foremost, the increase in sustainable investments at private banks will counteract greenwashing across the financial sector. This is because private clients choose sustainable investment strategies as a result of a genuine interest in generating competitive investment returns while having a positive impact on society and the environment.
Strategies that do not exhibit these qualities will not be chosen by private banks or their clients. In our opinion, this will render the debate about greenwashing moot. Competitive pressure will naturally shift the focus to the most compelling sustainable investment strategies.
Personalization of Sustainable Solutions
Secondly, the new rules and higher proportion of sustainable investments also have the potential to end the discrepancies and the lack of standards that exist between ESG rating agencies. Leading private banks already address this through their in-house sustainability ratings.
But in the future, we believe ESG ratings and scoring models will increasingly be complemented and focused on tailored, impact-oriented investment solutions. The most successful private banks will offer personalized, sustainable investment solutions that will enable clients to optimize their portfolios according to their values. This will lead to higher quality data, which will form the basis for tailored sustainable investment solutions.
Active Engagement: New Chapter in Driving Positive Change
As a result of the upcoming changes, we will also reach a new stage in terms of investor engagement. Private clients will have new opportunities to exercise their voting rights and engage with companies on sustainability issues.
Many private investors do not currently exercise their voting rights at shareholder meetings. This means there is substantial untapped potential. Private banks, we believe, will increasingly take on responsibility for the implementation of investor-led programs. By engaging with the management of individual companies on sustainability issues, they will drive the desired change that will have real-world impacts.
Encouraging the Transition
This Engagement provides the most impactful way of investing sustainably by encouraging the transition to a low carbon economy and a more sustainable world.
The new EU directives have the unique potential to identify client interest in sustainable investments and thus enable the industry and individual investors to deploy assets more actively and drive positive change. Ultimately this will lead to the mainstreaming of sustainable investing in private banking as well.