Sustainable investing has had an incredibly successful 2021, and reports show that it is only going to keep growing. With this in mind, financial institutions need to have the infrastructure to encourage more investors to incorporate ESG funds into their portfolios. It is no secret that sustainable investing has had a very successful 2021. According to Standard Chartered, sustainable investing is on the verge of mass adoption, with 61% of investors already having made sustainable investments, a 7% increase from 2020. During the first quarter of 2021, nearly 51% of overall European fund flows were from ESG ETFs, more than four times what was recorded in 2020. This momentum has not slowed down even as we enter 2022, which is why it has placed so highly on Capgemini’s list of 2022 wealth management trends, coming in second in both adoption priority and business impact.COVID and a new generation of investors boost sustainable investmentsIn addition to the COVID-19 pandemic bringing social and sustainable issues into the spotlight, shifting demographics have also been one of the main driving factors for sustainable investing’s popularity boom. As the younger generation matures and becomes involved in finance and wealth management, their habits and preferences are beginning to shape the investment landscape. Capgemini reports that unlike their predecessors, young investors are prioritizing their purpose in life, resulting in a greater focus on holistic and ethical financial planning. In order to stay ahead of the curve and capture younger investors, financial institutions must have the necessary infrastructure in place to support ESG investments and other forms of personalization.Lack of transparency is the main obstacleFinancial institutions and Fintechs need to do more to capitalise on and encourage sustainable investing. One of the main obstacles to the widespread adoption of sustainable investing is the lack of transparency in the area, both in terms of determining the sustainability of investments and in the impact of making sustainable investments. Indeed, 74% of investors feel that they would be more comfortable with the concept if they had access to professional guidance.Incorporating ESG ratings into portfolios is one way to increase the transparency of investments. These scores are generated when companies are evaluated on publicly available documents, media reports, and mandated ESG disclosures, such as the EU’s Non-Financial Reporting Directive. However, no two scores are the same. Agencies like Sustainalytics, MSCI, and FTSE ESG often have differing ESG scores for the same company, resulting in confusion and apprehension from investors. With ESG compliance being difficult to quantify, a standardised framework needs to be developed to better develop sustainable investing globally. Investors can build custom sustainable portfolios with PrivéPrivé Technologies has already made great strides towards incorporating ESG considerations into our products for our clients. We have successfully launched AI-based portfolio optimizers for leading insurance companies in which clients can not only select the proportion of sustainable funds in their portfolio, but they can also customize their portfolio by a specific sustainable theme such as renewable energy and water, just to name a few. Morningstar’s peer-reviewed ESG rating, is also available for each fund, allowing clients to make fully informed decisions.
In the future, we believe that such customizations will be the bare minimum. Here at Privé, we expect the level of personalization to grow even stronger, including options to completely exclude companies with unethical practices or histories such as child labour or modern slavery, and avoid unsustainable or environmentally damaging industries such as fossil fuels. Currently, Privé is engaged in ESG research that includes developing ways to include sustainable subtopics in line with the United Nations’ 17 Sustainable Development Goals, to give more specific and specialized choices to our clients, as well as to increase the transparency of the end-goal of their sustainable investments.
Sustainable investing is more than a trend, it is a complete paradigm shift in the way investors view and make their financial decisions. With almost 39% of HNWIs under the age of 40 expecting ESG ratings to be available for their products, building a strong foundation for sustainable investments should be on every financial institution’s to-do list this year.