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Aligning Sustainable Investments with Retail Investor Preferences-Setting up a future-proof framewor


  1. Sustainability impact has gone mainstream in Financial Investments, with expectations for transparent ESG data requirements growing manifold.
  2. Sustainable Investing regulations aimed at improving ESG transparency and comparability are gaining momentum.
  3. Sustainability Investment as a service (SIaaS) can leverage Capital Market Advisory and Digitization for optimal outcomes.


Sustainable Investment (SI) can be defined as the integration of Environmental, Social and Governance aspects in making an investment decision. As of 2020, sustainable assets in major financial markets are estimated to be US$35.3 trillion, mainly driven by investor demand and regulations. The growth of Sustainable Investment funds whose strategy aims at ESG themes has the potential to significantly contribute to addressing climate change and other sustainable investment goals.

The SI products that are available have different objectives, characteristics, and strategies, with Authorized Fund Managers (AFMs) seeing a high volume of ESG focus funds applying for authorization. The question though is how much of the SI products are integrating the ESG factors and meeting the client’s understanding and preferences.  Some notable regulations like EU based Taxonomy, SFDR and MIFID II ESG amendments and UK based SDR disclosures, UK Stewardship code collect data from investment firms and investors to monitor and identify any incorrect/misleading information the firms provide to the investing community.

This paper enumerates what is required to ensure SI meets the conduct and transparency expectations around product design, marketing and alignment to the Client’s ESG preferences.

Product design & Marketing

The wide range of Buy-side (Asset, Wealth Management, Pension funds) product firms have to change their approach on product design & marketing to meet the ESG requirements. The products can be Shares, Alternative Investment Funds (AIF), Bonds, UCITS Investment funds, Structured Products, REITs, Financial Instruments with an investment focus on Cryptocurrencies, Security Tokens etc. As investors’ appetite for these products grows, there is an equivalent amount of concern on transparency and integrity of the products’ ESG credentials. For example, ESG funds tracking the ESG index that do not hold the ESG stocks. Another example is a sustainable investment fund holding shares of two ‘high-carbon emission companies’ in its top 10 holdings, without any rationale behind their investment. Asset managers have to provide clear information explaining their chosen strategy to the fund’s approval authority. This will avoid misleading claims, otherwise known as ‘Greenwashing’.

During the product design phase, the firm should consider applying screening criteria aligned to the firm’s sustainability policies.

Negative screening can exclude companies that fail to meet certain standards such as UNGCC or by avoiding exposure to certain sectors, such as oil and gas companies.

Positive screening can enable investing in companies that focus on ESG themes such as water, waste management etc.

The Stewardship approach will involve the investors in the engagement and voting activity with respect to ESG matters that are integrated with investment decisions. The other important factor that can be considered is the ESG Scores & Ratings criteria based on ESG performance metrics. ESG product manufacturers need to apply ESG labels to all the marketing materials whose products achieve a certain benchmark score.

Client’s sustainability preferences

The next important step to enable a client’s interest in sustainable investment is to understand and apply the client’s sustainability preferences. In Europe, MiFID II ESG Amendment regulation states that EU Investment managers and advisors have to collect and incorporate their client’s ‘suitability preferences” in the product suitability assessment. This will apply to existing and new clients. MiFID II ESG regulation also considers criteria from other EU regulations like EU Taxonomy, SFDR Art 8 & 9 Funds and SFDR PAI. FCA in the UK also has a similar regulatory requirement. In this engagement process, it is important to ensure firstly that clients’ are educated better on the ESG concepts and the risks it involves. Towards such education and client awareness, Investment firms have to provide ESG training to their client-facing staff and to their advisors, who should act in a neutral manner and guide, but not influence the clients’ decisions.

The main challenge in this step is the availability of data to map the investment product with the client’s preferences. Even when data is available, approval from CSRD and EFRAG is critical for reliable qualitative indicators. Thereby, some mismatches can be foreseen between client preference and product suitability, which will need to be remediated through discussions with the clients.

Digitalization of Preferences and Suitability Assessment

The sustainability requirements require a new business capabilities involving MiFID II ESG questionnaire, suitability assessment, suitability report, product governance process and re-papering of pre-contractual information. Given the scale and extent of the data points required, the Investment advisors and the Portfolio Managers need to have the necessary digital solution and analytics to effectively scale their business capabilities to comply with the processes. The solution should be able to model the product mapping with the preferences and automatically collate ESG data from data providers. The investment firms can enhance their current framework by adding an ESG layer to model the suitability model, enhancing their existing KYC process to include ESG ratings and new exclusion criteria.


The changing ESG regulatory landscape will require a significant overhaul of a firm’s investments offerings to align with their clients’ ESG interest. The selection of the right ESG product based on client’s ESG preferences will reduce the mis-selling risk and legal expenditure. The distribution of investment products that have transparently disclosed sustainability features will also help to avoid greenwashing.

Green-bleaching, which means fund managers that invest in sustainable activities will refrain from claiming so to avoid data problems arising from the disclosure obligation, is also a concern to the investment community. The Product manufacturer has to collect granular level data from the underlying to disclose detailed product information through EET (European ESG Template) to their distributor, which is a complex and laborious work.

Overall, Investment firms have to take a proactive approach, engaging strong ESG domain and regulatory advisory and digitized framework to stay on top of the competitors and to meet the ever-increasing regulations.



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