ESG investment: impact on the supply of financial products

In recent months, there has been a lot of talk about the obligations of financial institutions on transparency in terms of sustainability in view of the imminent entry into force of the disclosure regulation on March 10th. 

This regulation, one of the first steps in the European Commission’s ambitious action plan on sustainable finance, will entail a complete transformation of the financial product offering. Institutions have to prepare themselves for the impact of the regulation on their business models, which some are already comparing with the effect generated by the adaptation to MiFID II and the transition to new business models based on the provision of advisory services. 

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90% of the investors surveyed would invest in sustainable products

Now, with the proposed changes in the MiFID II and IDD regulations on sustainable finance, the business world will move from a range of products, which does not take into consideration the sustainability profile of the companies invested in, to one in which sustainable products will be increasingly present, since the ultimate aim of the Commission’s plan is to redirect capital flows towards responsible investments, and this is only achieved by encouraging the demand for “sustainable products” and, therefore, forcing a broadening of the offer. To achieve this goal, the proposed amendments to MiFID II and IDD will oblige institutions to ask clients about their “sustainability preferences” in the suitability test and therefore to offer them products tailored to these preferences, which leads institutions to reconsider their product range in order to offer clients “sustainable products” that meet their “sustainability preferences.” 

The results of the survey included in the practical guide “Sustainability and Asset Management”, prepared by Analistas Financieros Internacionales (Afi), Allianz Global Investors, and finReg360, confirm that most investors are currently unfamiliar with sustainable investments, even though almost 90% say they would like to invest in sustainable products. However, with the entry into force of the disclosure regulation, it is expected that awareness of the products will increase with the entry into force of the disclosure regulation and that demand will increase when it becomes mandatory to ask them about their environmental, social, and governance (ESG) preferences through the MiFID/IDD suitability test. According to the customers surveyed, the range of sustainable products offered by banks is not sufficient, with only 16% stating that their bank has ever offered them sustainable products. This means that the margin for improvement that institutions currently have to incorporate sustainable products into their offer is very large. In this sense, institutions are already taking the first steps towards this objective and are beginning to integrate ESG factors in their investment decisions and, subsequently, incorporate products with specific sustainability objectives or characteristics. This trend is not only being observed in the securities markets as a result of the creation of “sustainable products” and the obligation to ask about ESG preferences but is also being extrapolated to the banking and insurance sectors.

In these sectors, sustainable criteria are beginning to be incorporated, for example, in the granting of loans with more advantageous conditions if they are aimed at financing projects that promote the fight against climate change and environmental protection, or insurance associated with the protection of electric cars. In short, the regulations are encouraging the financial sector to broaden its horizons and not base its decisions exclusively on financial criteria, but rather promote the incorporation of ESG criteria in its analyses and the redirection of its offerings towards sustainable products that meet growing customer demand, in order to achieve its ultimate goal of redirecting capital flows towards sustainable investments.

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(Featured image by nattanan23 via Pixabay)

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First published in Cotizalia, a third-party contributor translated and adapted the article from the original. In case of discrepancy, the original will prevail.

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