European wealth managers struggle to understand Mifid directives in sustainability assessments

by | Sep 7, 2023

Less than one in three ‘strongly believe’ ESMA MiFID directive on sustainability assessments will improve investor outcomes 

A new study from behavioural finance experts, Oxford Risk shows just two out of five (38%) European wealth managers are fully aware of and strongly understand the European Securities and Markets Authority (ESMA) MiFID directives on sustainability (ESG) assessments. 

Its study with wealth managers across France, Germany, the Netherlands, Spain, Italy, Switzerland, and the Nordics found that despite ESMA updating its guidelines to integrate sustainability factors, risk, and preferences into investment firms’ organisational requirements last September, there are still more than one in 12 (13%) wealth managers who admit they don’t know what the directives on sustainability assessments are or are unsure they understand them.  

Oxford Risk’s revenue from clients in continental Europe has increased by 300% in the past 12 months with part of the growth down to new ESG regulation in MiFID II countries as well as the increasing demand from investors for personalised advice. 

The research with wealth managers whose firms collectively manage assets of around €4 trillion found less than one in three (30%) ‘strongly believe’ the EMSA MiFID directive on sustainability assessments will improve investor outcomes. Over half (57%) ‘believe’ that it will improve investor outcomes, and one in ten (11%) aren’t sure whether it will or not. 

Despite this, the study reveals that European wealth managers still think there is room for improvement within their current processes. Just over a quarter (28%) ‘strongly believe’ their current process for establishing a client’s sustainability are helpful to building their relationship. 

Around 61% ‘believe’ their processes are helpful but more than one in ten (11%) aren’t sure whether their current process for establishing a client’s sustainability preferences are helpful to building their relationship or not. 

This new research comes as ESMA continues its call for evidence on the integration of sustainability preferences in the suitability assessment and product governance arrangements, with firms able to submit comments until 15 September 2023. 

James Pereira-Stubbs, Chief Client Officer, Oxford Risk said: “It’s concerning just how many wealth managers still haven’t gotten up to speed with MiFID II requirements, given we’re not far off a year since they came into force. The list of requirements may be long, with sustainability assessments making up just one part, but the key to understanding the solutions is simple: it’s all about client insights. Better insights into a client’s sustainability preferences; better evidencing of these preferences; and better presentation to clients of how these preferences match up with suitable investments for them. Get this right and you not only meet the spirit as well as the letter of the law, but also have more engaged clients, better asset growth and higher retention.” 

Oxford Risk urges wealth managers to address client sustainability preferences properly by adopting best practices and a methodology that adheres to the MiFID II regulation. Wealth managers need to be aware that whilst short-term sustainability preferences may change over time, a proper client sustainability assessment should accurately capture longer-term preferences removing the need for unnecessary exclusions and ongoing trades that may negatively affect client portfolio performance. 

Based on market-leading behavioural research, Oxford Risk’s suitability and sustainability tools continue to evolve, providing solid scientific grounding to questions of how much sustainable investing is suitable, and how much assets should be weighted towards specifically environmental causes.  

The company, which builds software to help wealth managers and other financial services companies assist their clients in making the best financial decisions in the face of complexity, uncertainty, and behavioural biases, has developed proprietary algorithms which rank products, communications, and interventions for their suitability for each client at a particular time. 

It believes the best solution for each investor needs to be anchored on a holistic view combining stable and accurate measures of Risk Tolerance, an understanding of their overall financial circumstances, and knowledge and experience. Behavioural assessments of financial personality then add the opportunity for investors to learn about their own attitudes, emotions, and biases, helping them prepare for any potential anxiety that is likely to arise. This should be used to help investors control their emotions, not define the suitable risk of the portfolio itself. 

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