• Capco
  • Published: 22 February 2022


There are clear global advantages in taking steps to increase the already large amounts of capital flowing into sustainable investment to combat global warming and other social ills. However, these flows bring with them their own risks – risks of greenwashing, mis-selling, inadequate information, and general lack of market and investment management transparency - so it is little wonder that regulators are doing their part to engage with the challenges.  

The European Securities and Markets Authority (ESMA) has been communicating its part in the EU’s roadmap towards a more sustainable economy since 2018.  Updates to MIFID II Delegated Regulation on the topic of Sustainable Investments (planned to take effect from 2 August this year) form the next step in that process. They will marry sustainable finance objectives with the regulators’ explicit agenda of increasing transparency and comparability to benefit investors.

On 27 January, ESMA released the latest consultation paper covering its proposed guidance on how asset managers are expected to assess investor ESG preferences, and the guidance looks more prescriptive than many industry observers expected.

Currently, there is misalignment across the industry between:

  • Broad availability of sufficient data on various sustainability metrics (emerging markets and Alternatives continue to pose data consistency and collection challenges)
  • Implementation dates for product governance updates to MiFID II made under the EU's ESG framework, as well as the implementation date for the sustainability preferences regulations

Although the guidance makes some allowance for this misalignment, it will nonetheless present firms with strategic and implementation challenges.

What does this mean for firms? Time to start with a blank page. 

There are levels of commitment and innovation to be considered here.  At a tactical level, firms could address customer sustainability preferences merely by devising the right set of questions – is the customer most worried about modern slavery or global warming? – and integrating this information-gathering module to their existing customer relationship management journey. But there is an opportunity to do so much more.  

To meet the requirements, firms will need to:

  • Capture investors’ sustainability preferences. The new consultation paper makes it clear that there will need to be an onerous record keeping of investors’ decisions, and any later adaptions of those decisions, so that the firm can prove it has taken investor preferences seriously. These rules will also apply to existing clients, who will need to submit their sustainability preferences at their next review. 
  • Help investors make trade-offs between sustainability preferences and their other priorities in terms of, for example, their financial circumstances, liquidity needs, investment objectives and risk tolerance.
  • Educate customers and help them navigate the complex taxonomy of sustainable investment metrics. 
  • Relate these customer preferences to the array of financial instruments included in their product range in terms of the proportion invested in economic activities that qualify as environmentally sustainable (as defined by three different measures: EU Taxonomy, SFDR and principal adverse impacts).  
  • Establish and deliver robust staff training plans to enable relationship managers to assist investors (both retail and institutional) through this complex environment.

The best chance of doing this dynamically, and (ahem) sustainably, is to properly invest in transforming the operating model.  Firms can see the regulatory implementation date this year as the start point of a longer roadmap for developing an approach that encompasses the full value chain and takes advantages of other market trends.  Digitisation of customer journeys, the increase in customer engagement channels and advances in data analytics (increasingly leverageable by even the smallest of investment firms) each present options for the CEO, CIO or COO who wants to take the lead in achieving market advantage through the response to investors’ sustainability preferences.

The sharpest question facing many firms is therefore: given the stakeholders and resources that need to be drawn together to develop a coherent strategy, how much can we accomplish in time to meet the deadline? 

There is a spectrum of legitimate answers.  The trick, as ever, is to quickly identify the route that maximizes long-term flexibility and competitive advantage, while minimizing shorter-term compliance risks and costs. 

For more information about the sustainability challenge and how we are helping firms today, please contact Rachel Coldham and Florence Thomas