How Wealth Managers Can Use ESG Regulatory Requirements to Improve Client Experience

Focusing on ESG as a way to add value for clients, rather than just a regulatory tick-box exercise, must be the way forward for wealth managers, says one expert.


Don’t fall into the trap of integrating environmental, social and governance (ESG) data just to meet regulatory requirements. Staying compliant is important, but ticking those boxes just for fun doesn’t always add value to your customers, explains Anastasia GeorgiouDirector of Client Solutions, Advisor Segment, at
the morning starEurope.


This article is part of this publication’s new report “Technology Traps Wealth Managers Must Avoid 2022”, published in partnership with EY, which is available for free download now.

As wealth managers, you know better than anyone that when clients invest, they think less about percentage growth and more about achieving their financial goals. For many, a sustainable future will be part of it. This is why integrating meaningful ESG data into your investment and advisory processes and communicating it with your clients can have a strong and positive impact on client engagement.

It can be easy to overlook this amid the myriad of new sustainability regulations that make things a little more difficult. In particular, regulations introduced as part of the European Action Plan for Sustainable Finance mean that wealth managers have stricter requirements on their plates in terms of reporting and using sustainability data.

As two key elements of the action plan, the EU taxonomy regulation entered into force in January 2022 and obliges managers to calculate the taxonomy alignment of their ESG funds, while the the Sustainable Finance Disclosure (SFDR) which began to take effect in March 2021 requires managers to disclose how sustainability risks are considered in their investment processes, including those that could have adverse effects on the factors of sustainable development (or the main negative impacts [PAIs] in the jargon of regulators).

Alongside the action plan, changes to the Financial Markets Directive (MiFID) II and the Insurance Distribution Directive (IDD) mean that from August 2022, a client’s sustainable preferences should also be included in the matching process.

Combining all of the above, that’s a lot of tick boxes to think about.

Fortunately, customer demand for sustainable investing is growing. Whether it’s David Attenborough’s latest documentary or a stronger societal consciousness born out of the Covid-19 pandemic, people have become more sustainability conscious and are using purchasing power to support businesses that have a positive impact on the environment. It’s no surprise that many want to take a sustainable approach to their finances and learn about the environmental risks associated with their investments.

For wealth managers, juggling sustainability data to meet regulatory requirements while adding value to the client experience requires a delicate balance. Here are some tips to help you avoid common pitfalls.


Don’t be overwhelmed by the data explosion

Sustainable investing is an evolving space – new data is made available daily and even non-regulatory market data is enhanced to reflect advances in disclosure and research.

For example, at Morningstar, we recently upgraded the Sustainability Globe ratings to include sovereign ESG risk, which expanded our rating coverage by 30%. In line with the EU Action Plan, we also worked on taxonomy alignment data for ESG investment vehicles, and additional company and fund level reporting on SFDR, including PAI impacts.

Many of these and other regulatory data points will be made available in a new European ESG data model called EET, developed by the European Working Group (EndDatEx) which is expected to be ready later in 2022. The model will cover all European regulatory datasets as well as other data aimed at helping advisers better define the suitability of their investments according to the sustainable investment preferences of a customer.

While all of these developments are undoubtedly positive, given that this could represent over 600 new data points, how do you avoid being overwhelmed?

Start by looking at your company’s approach to sustainability and how you want to develop your proposition. There is already a lot of sustainable investing data available to you, and you can find similar data points in the future. Almost 30% EU funds, for example, are now classified as Article 8 or 9 funds under the SFDR, meaning they have either ESG integration or ESG orientation.

Morningstar has a range of different datasets on ESG risk, carbon, product involvement, sustainability attributes and qualitative fund manager ratings. We can provide additional research data based on our comprehensive holdings database and Sustainalytics’ ESG research of companies and sovereigns, to find the right information that meets the needs of your business and your clients.

Remember that you can develop your approach to sustainable investing and advice, iterating and improving it from a more informed perspective as more data becomes available. Expecting the perfect dataset is not a reality.


Put your customers at the heart of the proposal

Your clients are probably more interested in sustainable investing than you think. Recent Boring Money research has indicated that 83 percent of investors would appreciate a conversation with an advisor about sustainable investing, and 40% say the Covid-19 pandemic has made them think about it even more.

Morningstar also conducted research with Boring Money to gather feedback from UK retail investors on the use of sustainability data in reporting. From “eco-warriors” on one side of the spectrum to those solely focused on returns on the other, the results confirmed that to deliver meaningful ESG data to clients, a deep understanding of their motivations was essential first. location.

How environmentally and sustainability conscious is your customer? What is the goal of their current or proposed investment, and how does it meet its E, S, and G considerations?

Avoid getting caught up in regulatory framework and jargon – most investors will not want to be presented with taxonomic alignment measures or Article 8/9 data. Instead, they want information that is digestible and easy to understand. Things like investment objective, third-party validation metrics, explanatory content, visuals, and context go a long way.

Putting your customer at the heart of ESG integration and adoption across the business will help you improve personalization, build trust and portray integrity, all of which improve client experience.


Get ahead of digital disruptors
You can be sure that digital disruptors in the wealth sector will already be on top of points one and two. They’ll move forward with what’s available, iterate over time, and not get lost amid the explosion of new data.

Disruptors primarily provide a digital or hybrid consulting solution, which makes the customer journey all the more important. These companies are totally customer-focused when developing their solutions, taking the time to listen to their customers and sharing that information with the entire company. Nor will they regurgitate regulatory data points – they will listen carefully to individual needs and translate what is required from a regulatory perspective into an accessible and humane solution. To have a chance to compete in the ESG space, you need to do the same.

Integrating sustainability data into your investment and advisory processes is now a necessity. While businesses will continue to be challenged from a regulatory perspective as disclosures rapidly evolve, remember to keep your customers in sight. One person’s ESG goals and objectives will be entirely different from another’s and trying to meet all of these ambitions highlights the need for diversification in products, information and, most importantly, how they are communicated.


About Morningstar
Morningstar, Inc is a leading provider of independent investment research in North America, Europe, Australia and Asia. The company offers a broad range of products and services for individual investors, financial advisors, asset managers and owners, pension plan providers and sponsors, and institutional investors in the private debt and capital markets.

Morningstar provides research data and insights on a wide range of investment offerings, including managed investment products, publicly traded companies, private capital markets, debt securities and market data world in real time. Morningstar also offers investment management services through its investment advisory subsidiaries, with approximately $260 billion in assets under advice and management as of September 30, 2021. The company has operations in 29 countries.

Learn more by viewing Resources from Morningstar’s European Sustainable Finance Action Planand reading on the sustainable investing approaches we can support.


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Dolores W. Simon