New Boost for ESG Products

The new provision states that, as of August 2nd, 2022, investment advisors are required to explicitly ask their potential clients during advisory meetings whether they want to consider sustainable investments in their investment strategy.

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Advisors with new responsibilities

The newly introduced Mifid II rule comes at the right moment: Already, around 80 percent of all green investments come from Europe, according to a study by analyst Morningstar. The old continent is thus establishing itself as a focal point for climate, environmental, and socially responsible investment products. In order to further support this trend and to prevent distortions in the future, investment advisors should do their bit to firmly anchor the issue of sustainability in the minds of the investment community.

Germany in particular is on the right track here. Last year, the investment volume of private investors tripled to more than €130 billion, according to surveys by the Forum nachhaltige Geldanlagen trade association. But because there are still no precise minimum standards for ESG products, the role of the investment advisor is becoming increasingly important.

A broad information base is still important

Even in view of the increased duty of investment advisors to provide information, it is worthwhile for investors to take an additional close look at the issuer and the companies included. Precisely because the question of what is sustainable and what is not has not yet been definitively settled, every investor is called upon to evaluate products on the basis of his or her own ideas.

A good example of this is the issue of nuclear power. As is well known, the EU has classified nuclear power plants as sustainable energy sources on a transitional basis until renewable energies can take over full supply. But this view is not without controversy.

For many investors, nuclear power means a no-go in sustainable investments. Therefore, only a detailed look at the product portfolio of an ESG product can definitively clarify whether it matches one’s own views, beliefs, and expectations.

The same is true for natural gas. Quite a few ESG products include gas-fired power plants as a climate-friendly energy source. Investors can only decide for themselves whether the use of fossil fuel is actually climate and environmentally friendly.

Impact funds – investment products that not only act as a green seal but actively seek to influence the environmental policies of countries – contain neither. They consistently focus on renewable energies and companies with high-quality social compliance. But here, too, it’s worth taking a close look to make sure the contents match the packaging.

Personal initiative with massive impact

The special feature of sustainable investments is: that the investor is not just a customer – he is an active protagonist on the way to a climate-neutral and sustainable future. By making individual investment decisions, an individual can have a significant impact on the direction of governmental and international climate policy. In particular, a close look at the composition of ESG products helps to separate the wheat from the chaff.

There are still – albeit increasingly rare – supposedly sustainable bonds that include oil companies or manufacturing plants with unfair production conditions. The attention of the individual investor helps to keep the segment of sustainable investments clean and thus to have an optimum impact.

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

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