Many financial institutions have been dealing with sustainability for a long time now.
Objectway, featuring The Wealth Mosaic The Rise of ESG in Wealth Management report investigates how ESG has gone well beyond the wealth management industry’s agenda, currently being at the centre of today’s risk management approach and gradually shaping the future of tomorrow’s investing perspective.

Previously on ESG

In the past, the most common way to incorporate sustainability has been via the inclusion of an indicator at the financial instrument level. As of 2021, this has been replaced with an instrument characteristic: “Intended Compatible With Clients Having sustainability preferences” where next to ESG, additional and more general sustainability objectives could be captured.

From this initial foundation, what is now needed is a deeper and broader notion of sustainability, and this is where ESG scores and ratings come into play. With this, ESG information is issued and harvested from companies on a recurring basis; large ESG data sets can be obtained from commercial data providers. However, we see several pitfalls in this approach.

First of all, the companies choose what they disclose. This naturally creates conflict, as no company is willing to have a bad score.

Secondly, the information provided by companies is used by data providers in their proprietary ESG scoring, and rating frameworks, which means comparing results from different providers is extremely difficult.

Thirdly, the information is somewhat outdated, as company reports are issued yearly. As sustainability goals and objectives have tight timelines, the lag in frequently updated information hinders the process.

To overcome this pitfall, new players in the News and Social domain are launching near-time ESG insights. Social information is quick but can be biased, and therefore the trust levels on information via social channels can be low. The way to overcome these pitfalls is through regulation and reporting standards, which is never a quick route. Still, as investment management is largely built around trust, it is the only way to keep faith in ESG initiatives.

Extra indicators from 2022

Besides these pitfalls, the next evolution in this domain is the inclusion of ESG and Sustainability impact information in European MiFID Template (EMT) 4.0. Fifty quantitative disclosures will be added, which include a core set of mandatory indicators and additional environmental/social factors to assist in identifying other impacts. Indicator examples are:

These changes will broaden the scope of client preferences within the investment decision process. Not by accident, this nicely falls together with the trend of hyper-personalisation.

Next Steps

Banks and other financial institutions will have to assess how to efficiently start using or extend the usage of sustainability information. To begin with organisations, the following steps should be considered:

With sustainable investment portfolios, operations, strategies and culture growing around the world, the imperative of ESG improvement is clear. It’s up to organisations to utilise the new tools available to them, to create value, to build future resilience, to drive changes that will benefit their business, their investors and the planet.