On August 2, a regulatory change came into force that will contribute to promoting much more investment under sustainability criteria. By virtue of an evolution of the European regulation on financial products, known as Green Mifid II, banks and financial advisers have the obligation to ask their clients if they want their investment funds to take into account environmental, social and good corporate governance criteria (ESG). That is, if when choosing the companies they have in their portfolio, they are going to consider, in addition to sales, debt or cash flow metrics, also issues such as the carbon footprint, female representation on their governing bodies or its commitment to end slave labor in any of its suppliers.
Rebeca Minguella, CEO and founder of Clarity AI – a company dedicated to collecting all kinds of ESG information and then offering it through a platform – believes that this is an important step to help expand investment under sustainable criteria. “Until now, those who have been most involved have been companies and large investors, but this is going to make more people aware that they can generate a positive impact with their investments.”
Once the client answers that they do want their funds to have a sustainable approach, the adviser or the bank has the obligation to offer them products that have that ESG profile.
For a product to be eligible, it will have to meet several characteristics. It must have a minimum percentage of investments linked to the European green taxonomy, a minimum according to the Sustainable Finance Disclosure Regulation of the European Union or a minimum of investments that take into account the main adverse events (PIAS). The latter refers to the consequences derived from investment decisions. The PIAS indicators allow the negative impact of economic activities on sustainability factors to be measured.
If a product does not meet any of these three criteria, it cannot be offered to the customer. In these cases, the norm establishes that the individual will have to change his sustainable preferences. The entity will have to document it, explain the change in profile and it will also be monitored.
Although it is still too early to measure the depth of the so-called Green Mifid II, the sector is convinced that it will cause a very significant increase in the hiring of socially responsible investment funds, an area in which Spain had been very lagging behind other countries.
Until now, the two star formats for ESG investment were the so-called article 8 funds and article 9 funds. The first are those investment funds that generically take into account these extra-financial criteria, such as the fight against climate change or the United Nations Sustainable Development Goals. Article 9 funds, considered the true black-legged sustainable funds, are those that pursue a specific environmental or social objective, and measure the impact that their investments have in achieving it.
In general, all the people who in the next suitability tests answer that they want to keep ESG criteria in mind when investing, will be referred to these two types of article 8 and article 9 funds.
The modification of Mifid II requires including additional questions about the client’s sustainability preferences, but also asking the client to what extent he wants to include sustainable products in his portfolio and to recommend or purchase products that respond to the preferences.
To prepare for this new regulation, banks have had to train thousands of employees so that they are capable of advising their clients on sustainable investment issues. CaixaBank has a 75,000-hour plan in place that affects a group of more than 30,000 employees. Banco Sabadell has also enabled courses on the internal platform on Green Mifid, among the usual ones that are used to recertify Mifid. The same is happening at Banco Santander, as well as at BBVA or Bankinter, which have been instructing on sustainable finance since the beginning of the year.
These new questions about socially responsible investing won’t just affect new clients. Advisors are required to periodically update the suitability tests they perform on their clients when defining their investment portfolio. In some cases it is once a year. Or every two years. But when they come back to poll them about their economic situation or their financial preferences, they will already have to incorporate the question about sustainable investment.
In the case of automated advisory firm Indexa Capital, the question they ask their clients is “do you want to incorporate a socially responsible investment bias into your portfolio?” According to the CEO of the firm, Unai Ansejo, 16% of the new clients who are asked decide to bet on portfolios with an ESG profile. In the case of old clients, only 4% are transferred to sustainable funds.
To serve those who do want to seek this socially responsible approach, the firm has designed 10 portfolios (depending on the higher or lower level of risk) that invest in ESG index funds. For example, in the World Stock Market they have the Vanguard ESG Developed World and the Vanguard ESG Emerging Markets. For the most conservative portfolios, they have opted for the Amundi Index JP Morgan Global Government Bonds fund and for corporate debt, the iShares ESG Screened Global Corporate Bond, from BlackRock.
On average, the costs of socially responsible investment (ISR) funds are 0.08 percentage points more expensive than the normal funds that Indexa uses for the rest of its portfolios. This is due to the fact that the index construction companies carry out a detailed analysis in terms of sustainability, governance and social responsibility of the companies in the market before constructing the SRI index, incurring higher expenses than conventional indices. It also influences that the ISR funds are, for now, smaller, which implies sharing the expenses among fewer people.
Regarding profitability, Pablo Porres, director of investment and savings at ING, explains that “there are still no conclusive studies that indicate that returns must be sacrificed for investing with sustainable criteria.” Just in 2022, the greenest funds have suffered because they had a greater component of technology companies in their portfolios and renewable energies, two industries that have had greater falls this year than the market average. “But in the preceding years they were sectors that did very well,” he adds. In any case, it does seem clear that in the long term the whole world of investment is going to move to less polluting industries that are more committed to the planet.
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