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Key decisions in sustainable finance



Olivier Carré, Partner, Financial Services Market Leader, PwC Luxembourg. ( Crédit Photo: PwC Luxembourg ) 

Olivier Carré, Partner, Financial Services Market Leader, PwC Luxembourg. ( Crédit Photo: PwC Luxembourg ) 

Sustainable Finance has long been a topic discussed outside of the financial services industry, with many corporate and financial institutions voluntarily signing the PRI (Principles for Responsible Investment) or UN SDGs (Sustainable Development Goals) charter. But since last year, external forces impacting the industry have changed considerably.

Both from an investor and regulator perspective, the financial product ‘manufacturers’ and ‘distributors’ are confronted with new standards and expectations. The political landscape, at least in the EU, has ‘elevated’ sustainability to one of the key goals of the Commission’s political agenda (‘EU Green Deal’) for the coming five years, with consequences way beyond this timeframe.

The industry is now directly targeted by laws and regulations that impose governance, investment and disclosure standards serving ESG (Environment, Social, Governance) goals, making sustainability a strategic matter on the same level as investment performance.

Sustainable Finance thus has two angles: a regulatory compliance (must-have) and a business strategic.

Business impacts & strategic decisions for a product manufacturer

The impacts for manufacturers of financial products are spreading through the full value chain. The regulator targets the inclusion of sustainability/ESG criteria in the investment approach. This will require fund managers (UCITS & AIF) to redesign their investment process and to gather additional data on their investment targets.

These targets, i.e. the corporates, will be required to disclose more sophisticated sustainability data.

As such, the strategic business decisions for a manufacturer are limited to (i) not adopting sustainable investment strategies or (ii) to ringfence the new approach (i.e. limited number of dedicated products) or (iii) to include the sustainability criteria as a baseline in all its portfolios and investment strategies.

Whatever the choice, all these changes will be subject to disclosure requirements starting March 2021 and subject to minimum technical criteria, defining sustainable business activities, starting 2022/2023 (i.e. Taxonomy).

Business impacts & strategic decisions for a distributor/investor

On the investor side, the impacts will be different between the wholesale/retail investors and the institutional/fiduciary investors (i.e. pension funds, insurance companies).

For the wholesale/retail investors, the distributors subject to IDD or MiFID will ‘ask’ the investors about their preference to invest in a sustainable manner. The probability to have positive requests being very high, distributors need to decide on two main strategic choices: (i) what new (sustainable) products to add to the product shelf and (ii) how to include the sustainability objective into the client risk and investment profile.

In particular the management of a double investment objective, i.e. financial yield and sustainability, will stress the discretionary and investment advisory teams and systems, triggering operational and upskilling challenges.

Finally, institutional investors have been for years imposing sustainable investment behaviours onto their product providers and investment managers, which is now ‘formalised’ via the EU rulebooks. So, the pressure from this client segment will further accentuate the strategic choices of the manufacturers to consistently and credibly implement sustainability into their product range, most likely on a much broader scale than anticipated today.

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