Private banks are navigating challenges in discerning customers› sustainability preferences, hindered by a lack of common definitions and necessary data. The struggle persists as new legislation under Mifid 2, effective since August 2022, mandates including sustainability factors in suitability tests. Oxford Risk’s survey among wealth managers reveals industry-wide difficulties in implementation.
A significant number of asset managers confess to lacking comprehension of the new rules, lacking systematic methods for identifying sustainability preferences, and relying heavily on clients for risk assessments. The industry, grappling with complexities, awaits crystallization of new legislation.
Vincent Triesschijn, Global Head ESG and Sustainable Investing ABN Amro, recognises that there are many challenges around eliciting sustainability preferences from retail customers. He points to the availability of data and classification of services and products. There are also challenges in terms of processes and product governance.
“Fortunately, ABN Amro has the size, capacity and resources to properly set up and record these processes and monitor customer preferences,” said Triesschijn. “But challenges that apply across the industry also apply to us, for example the limited availability of sustainability information and ESG data on companies we invest in.”
According to laws and regulations, customers must decide for themselves what their preferences are, financial institutions are not allowed to steer this, but should obviously provide customers with correct and understandable information, Triesschijn said. “To this end, we have, for example, prepared a brochure that has been positively received by our customers.”
Bottlenecks
Wieke Maarleveld, director of product development at Van Lanschot Kempen, also sees bottlenecks when asking for sustainability preferences. “We recognise the complexity of the new sustainability provisions. This is new legislation that has to crystallise in practice, while the industry already has to implement the rules.”
Moreover, Van Lanschot Kempen also did not have the tools and systematic method to conduct the call-out and incorporate this into the suitability test.
“We have now fully implemented the questioning of sustainability preferences in the existing tooling we use to map our clients› objectives and risk attitudes. In addition, we have adapted the IT infrastructure so that we can also continuously test, based on new sustainability data, whether all management and advisory portfolios still meet the clients› sustainability preferences. This was quite a complex project that we were able to complete in a relatively short period of time,” said Maarleveld.
Uniform definitions
Mark Buitenhuis, managing director private banking regions at Van Lanschot Kempen, said that private banking clients can indicate their sustainability preferences online, but this is also included in the personal conversations the private bankers regularly have with their clients.
“This is because it is not always clear to customers what is meant now, as the legislation and questioning are quite complicated,» Buitenhuis said. “For both the customer and the private banker, a personal conversation is pleasant, because sustainability is an important topic these days. Prior to the questions they receive, we sent our clients a brochure. In it, we explain, among other things, the differences in sustainability profiles and which investment concepts are appropriate for a particular sustainability preference.”
Like ABN Amro, Maarleveld also finds the lack of ESG data a challenge. “The sustainability data the industry wants to use is still under development. On top of that, a common language is also needed. What exactly is sustainability? The legislator gives a general definition and providers of investment products can then flesh it out themselves. They can also choose the data they use to do so. Ultimately, there needs to be a common language, so customers do not compare apples with oranges,” said Maarleveld.
Buitenhuis adds that some definitions set by Van Lanschot Kempen based on laws and regulations are relatively new for clients. “What percentage of sustainable investments is desirable, for example? That is not always clear to clients. A percentage of 30 per cent sustainable investments, what exactly does that say? There is clearly a need for uniform definitions and we expect that these will come in the coming years.”
AFM investigation
In a written response, the Financial Markets Authority (AFM) said it considers compliance with suitability standards in the context of sustainability important. Investors should have access to a sustainable product range that suits their sustainability needs, according to the regulator. That is why the AFM launched a survey on compliance last year. The aim is to get a picture of where companies stand in asking for sustainability preferences in the suitability test and where improvements are needed.
To this end, a market-wide self-assessment was sent out with questions for companies to answer on compliance with sustainability suitability standards. In addition to the self-assessment, the AFM held in-depth interviews with a number of firms. The aim is to gain more insight into the concrete steps companies have already taken in practice to include sustainability preferences in the suitability test. The AFM expects to publish its market-wide insights from the survey in the second quarter.