SUSTAINABILITY IN WEALTH MANAGEMENT PART II. – POTENTIAL BENEFITS OF SFDR COMPLIANCE

esg in wealth management blog by dorsum

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In our previous episode we gave an overview of the most important challenges and opportunities for wealth managers regarding ESG investments. In this episode we share insights about the investor-side benefits of SFDR (short for Sustainable Finance Disclosure Regulation). 

The wide range of products and a lack of common standards across the sustainable finance industry can make it difficult to compare sustainable investing options. The basic goal of the SFDR is to make disclosures about green, sustainable investment and savings products that are available on the market more reliable, informative and clear for investors, thus contributing not only to awareness but also increasing product offerings. 

Under the SFDR the involved financial players have already had to comply with the disclosure requirements at the first level as of 10 March 2021, and further regulations will be phased in in the future, with the first two set to be implemented on June 30 and December 30. Although the regulation is far from complete, it already appears that the investment services market will face a wide range of obligations. The standards cover ongoing, periodic and pre-contractual disclosure obligations on the organizational and product levels.  

Without further elaboration, it is clear that there is plenty to be done by investment firms in complying with the regulatory side of ESG.  

In addition to supervisory burdens, pressure from consumers is also substantial in the field of ESG investments. For example, based on results from various European studies 70% of retail investors are interested in sustainable investing on average. 

This kind of interest is quite apparent when we look at investment funds in the European Union: in 2020 Q4 as shown in the chart below, 45% of total European fund flows consisted of sustainable funds which now represent more than 10% of all European funds. 

esg fund flows

At the same time, 56% of investors would prefer their advisors to be more active in helping them invest in ways that have a positive impact. That is, the openness of consumers (investors) in the field of wealth management has led to an increase in their needs and expectations towards advisors and investment companies. 

It has been a constant challenge for the industry to be able to adapt to regulatory change in the smartest and most cost-effective way. When compliance goes hand in hand with customer needs performing the task itself is still challenging, but the result will be more than the usual fulfillment of another obligation: it will also be an opportunity for growth and profit by quickly and thoroughly adapting to servicing these growing market demands. 

Thus, SFDR compliance is not just legal compliance but also an opportunity to serve customer needs. With a slight exaggeration, it can be said that investors are starving for ESG products and related reliable information. In other words, the changes made in the field of ESG can mean not only the minimum level of implementation of SFDR obligations but also the relevant enrichment of the customer experience and satisfying the needs of investors. 

Transforming compliance into a value-adding activity is essential to achieving a competitive advantage. 

At Dorsum, we aim to help Wealth Management firms strike the fine balance between being prepared for the regulatory changes and keeping up with customer needs. To learn more about ESG and sustainable investing, read our e-book and stay tuned for the next episode in which we provide an overview on how exactly our products are ready to support ESG investments and the SFDR regulation. 

 

Sources:

Morningstar (2020)

Deloitte (2017)

Capgemini (2020)

Wealthprofessionals (2020)

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