It is important to highlight that sustainable finance requires more than simple risk management. The financial services industry can play an important role in transitioning to a more sustainable world including steering capital away from the most polluting companies and toward those demonstrating environmental and social leadership.
Consumers and private investors’ awareness and interest in sustainability is on the rise
The Economist’s Intelligence Unit (EIU) published a comprehensive report on behalf of WWF ², which suggests that we are in a phase of global upheaval. The report shows lasting changes within the consumption and lifestyles of people globally.
When it comes to private investors, surveys show that over two-thirds of investors in Europe consider sustainability important to how they invest ³. This percentage is even greater for investors below the age of 45.
Both interest in and apprehension of sustainable investments is higher among affluent investors. These investors need and expect to have conversations with their wealth management advisors on the topic of sustainability. A majority of investors who do not yet have sustainable investing products in their portfolios plan to add these in the next one to three years.
Sustainable Finance Initiatives in Europe and the UK
The EU: leading the way
The European Commission (EC) has set out a broad Sustainable Finance Action Plan (SFAP) with the objective to reorient capital flows towards sustainable investment in order to achieve sustainable and inclusive growth.
Firstly, the SFAP introduces new requirements through the Sustainable Finance Disclosure Regulation (SFDR). Since January 2023, the SFDR changes the way products are classified in terms of sustainability, but also introduces the concept of Principle Adverse Impacts (PAI). PAIs focus on the negative impact of an investment on climate change, and social- and employee matters.
Secondly, Environmental, Social, and Governance (ESG) goals are embedded into the MiFID II framework, the EU’s legal framework for securities markets, investment intermediaries, and trading venues. As of 2022, MiFID II requires private banks to assess investor Sustainability preferences and match these with relevant products at a granular level based on three factors: environmental, sustainability, and PAI alignment.
The UK: catching up rapidly
The UK is currently drawing up regulations with similar intents as the EU Sustainable Finance Disclosure Regulation. On October 25 2022, the Financial Conduct Authority (FCA) published proposals on sustainability labels and disclosures for UK fund managers, portfolio managers, and distributors to mitigate greenwashing risks. These rules require changes on investment labelling regimes, naming and marketing rules, disclosure requirements and rules for distributors. Additionally, the FCA proposed a general ‘anti-greenwashing’ rule, which will come into effect immediately after the publication of the final rules to all FCA regulated firms (expected in June 2023).
Implications for intermediaries
Access to sustainable investing expertise and knowledge will be critical for intermediaries to navigate complexities of sustainable finance regulations across different jurisdictions, where requirements and product classification can differ significantly. In addition, it will be crucial for advisors to learn how to engage with clients proactively and effectively on the topic and cater to their specific sustainability preferences.
And while regulations in the EU and UK, combined with the growing interest of investors in sustainability, do create challenges for intermediaries, they also create new opportunities. Intermediaries can build up their knowledge on this increasingly important topic and offer in-house expertise – or work with a trusted partner who offers the expertise, processes, and investment products, from mandates to funds – in order to help their clients generate a positive impact for themselves and the world they and future generations will live in.