Intermediaries must actively address sustainability preferences in investments. But very few follow this requirement.
Since August 2nd of this year, there is no way around it – at least on paper. Advisors are now obliged to ask their customers about their sustainability preferences when it comes to investments. This query is an integral part of the so-called Insurance Distribution Directive (IDD). But three months after its introduction, the results are sobering: according to a joint analysis by the consulting firm EY and the software company Bao, 78 percent of intermediaries fail to address the sustainability preferences of their customers in the advisory meeting. Why is that, and how should the query actually work in practice?
“The required content and scope of the preference query is defined in the IDD and is the door opener for the rest of the conversation in the ESG advisory process,” said Patrick Pfalzgraf, Partner at EY EMEIA Financial Services. Questionnaires such as the ESG module for querying sustainability preferences, which was adopted by the DIN committee “Financial Services for Private Households,” provide guidance. It is part of DIN standard 77230 “Basic financial analysis for private households”, but can also be used separately. The Defino Institute for Financial Standardization makes the questionnaire available to advisors on its website. The stated goals: are to structure the preference query and enable a targeted, simple query process that also serves as a documentation record.
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So information on how and, more importantly, what advisors should query is basically available
Nevertheless, ESG does not play a role in four out of five cases. As part of their “mystery shopping study,” the EY experts conducted a total of 85 telephone and online advisory interviews with agents from 13 insurance companies. Their main focus was on the quality of advice in the area of sustainable investment. The disappointing finding: in 95 percent of the conversations, the level of knowledge on the subject of sustainability was not queried, and 65 percent of the documents sent contained no information at all on sustainable products. “Sustainability tends to be avoided, apparently for a variety of reasons,” Pfalzgraf says. “But the fact that much of the industry is not complying with a current law is certainly not intentional.”
But what is the problem? A major problem for many advisors seems to be the fact that there are still no official, uniform definitions for ESG criteria. In the financial world, the abbreviation has indeed become generally established for the areas of environment (E), social (S) and corporate governance (G). What the individual points mean in detail, however, is not always entirely clear. What exactly does sustainable management mean, and what does good corporate governance mean? If you don’t want to be put in a predicament during the consultation, you have to formulate your questions carefully.
Knowledge gaps among intermediaries
The DIN committee suggests the following question to get started: “Do you need basic information about the European Union’s sustainability goals for money and capital investment and about the possibility of formulating sustainability preferences?” If the answer is yes, advisors will find explanations of the EU’s sustainability goals, the Green Deal and the EU taxonomy suggested by DIN in the online catalog.
If the green prior knowledge is available, the next step is to get to the heart of the matter: Should the topic of sustainability be taken into account in one’s own financial investment? If the answer is no, advisors have thus already fulfilled their duty to ask about sustainability. If the answer is yes, the intermediaries must determine the “what” and “how,” set focal points in terms of content, and work out priorities. The DIN catalog also helps here: What minimum share should go to environmental goals (E), what to social goals (S)? Should investments be made exclusively in sustainable companies? Which individual issues are important to investors? And which areas should be completely excluded from the investment?
“If there are no ESG-compliant investment products to distribute or the provider has not classified them accordingly, intermediaries are naturally up in the air,” Pfalzgraf adds. The overall problem, however, goes deeper. Often, the knowledge on the intermediary side is not yet sufficiently available for dedicated sustainability consulting. One short-term solution, he says, is to establish sustainability competence centers. “Customers interested in sustainability can thus be directed to specialized sales units or certified sustainability consultants in the respective organization,” says Pfalzgraf. “In the medium term, however, there is no way around the intensive and recurring training of all intermediary personnel.”
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First published in Capital, a third-party contributor translated and adapted the article from the original. In case of discrepancy, the original will prevail.
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