After Greenwashing: How Banks Rebuild Confidence in Sustainable Investing

From regulation to innovation: Finding your way through the product maze

The EU legal framework for sustainable investing pursues the right goals, but its implementation still has room for improvement. Successful implementation requires market- and customer-oriented regulatory guidelines that provide orientation. The EU's rules-based approach (EU Taxonomy and Sustainable Finance Disclosure Regulation) is currently hardly suitable for this purpose.

It remains to be seen to what extent the new proposal of SFDR will lead to improvements. The flood of data, with its high technical complexity, is something that client advisors cannot yet explain to their clients, nor can clients themselves understand. As a result, most client advisors avoid the topic.

The self-regulation of the Swiss Bankers Association, which follows a principles-based approach, has shown how it can be done differently. Banks can use these principles to design their ESG framework in a way that provides their clients with guidance amidst the confusing array of products.

The example of a Swiss asset manager demonstrates how the design possibilities of this principles-based approach can be used to develop a client-centric offering. With the support of Finalix Business Consulting, the three sustainability preferences were designed to be easily recognizable to clients:

•   Risk-oriented return: Integration of financially significant ESG risks to optimize returns
•  Reduction of negative impacts: ESG investment solutions that mitigate negative environmental or social impacts
•  Positive contributions: Sustainable investment solutions with a positive impact on the environment and society

Self-regulation served as an innovation driver for the development of a client-friendly ESG offering. The guiding categories were successfully linked to EU requirements, enabling the asset manager to address the ESG needs of its clients with an easily understandable offering. A clear competitive advantage over banks that have closely aligned their ESG framework with EU requirements.

What clients expect from ESG investing

The current range of ESG investment solutions is often geared towards approaches that focus on regulatory requirements. This makes it difficult to match the needs of ESG-conscious clients. Furthermore, it's not uncommon for a single bank to use multiple approaches. This further complicates matters for both client advisors and clients.

For banks to cater to their ESG-conscious clients, they need to focus on their needs. This sounds obvious, yet regulatory requirements are still far too often prioritized, leading many client advisors to avoid the topic altogether. In other words, future success will belong to those who manage to transform ESG investing from a compliance issue into a client-centric one.

Understanding client needs is the first step. For retail clients, sustainability is often based on personal values and the desire to make a positive impact, with the financial aspect frequently taking a back seat. For example, this includes promoting a livable environment for future generations or ensuring security and peace.

How ESG investing can be fun again

Aligning banks' ESG investment solutions with customer needs would bring joy to both advisors and clients. To achieve this, banks can create customer groups based on their ESG needs. This could be structured as follows:

1. Ethical principles and values such as exclusions
2. Avoiding negative effects by best-in-class approaches
3. Achieving positive change through impact investing

Stories are particularly well-suited for addressing emotional needs like these in sales. Based on the customer grouping described above, a product can be presented as a story that addresses the customer's specific needs. It is important that these stories stand up to fact-based scrutiny. This fact-based storytelling is objective and individually tailored to each customer group.

Conclusion

Banks that possess the skills to put the needs of their ESG-conscious clients in the middle and thereby transform ESG investing from a compliance issue into a client-centric one will win the next phase: Clients would once again invest sustainably with conviction, client advisors would rediscover the topic, and ESG investing would be freed from its regulatory constraints – aren't those promising prospects?

For further information on this topic, please contact Dr. Marcus Fenchel.