New EU rules: Financial advice goes green

Enlarge image

Man in the forest:

In the future, investors should provide information about how they deal with sustainability

Photo: Becker&Bredel / IMAGO

What's new?

From this Tuesday, bank advisors and asset managers must also ask their customers about sustainability in financial investments.

The new rule is part of the European Union's (EU) efforts to channel more funds into sustainable investments.

In this way, the EU wants to play its part in the fight against climate change.

The EU has already taken various steps to this end.

As early as March 2021, the Disclosure Ordinance came into force, which obliges providers of financial products such as investment funds to make transparent the extent to which their offers pursue sustainable goals.

Likewise, the EU has developed its taxonomy, which serves to divide economic activities into "sustainable" and "unsustainable".

Added to this is the

.

The regulation is part of a whole series of new EU regulations that are gradually coming into force under the abbreviation "Mifid II".

In other words, investment advice will no longer only be about return opportunities and risk, but also about the environment, social issues and good corporate governance: the abbreviation ESG (Environmental, Social, Governance) is finding its way into advice.

What does that mean specifically?

What do you mean by sustainable?

Should sustainability be taken into account when investing your money?

How "green" should your financial product be?

In the future, savers and investors will be confronted with these and similar questions during the consultation at their bank.

It is obvious that hardly any of this can be answered in a few words.

.

As a result, both consultants and customers are in danger of being overwhelmed.

The new regulations include "the complete regulation of the last three years," says Kassel finance professor

.

That is for a consultation that often lasts half an hour."

"The implementation of the Mifid II requirements is crazy for consultants," says Klein.

"One problem is: How can you explain to a customer in a short time what, for example, taxonomy and disclosure regulations are? The main problem then is the so-called mapping: How does a consultant find the right products that the customer then buys?"

Expressed in figures, the new regulation could have the following effects in the future: Suppose a customer wants to invest 60 percent of 10,000 euros in ecologically sustainable systems within the meaning of the EU taxonomy regulation.

In this case, an investment advisor could recommend a sustainable financial product for 6000 euros and a product that has nothing to do with ESG for the remaining 4000 euros.

Are there exceptions to the new EU advisory rule?

Yes.

- they can continue to advise as usual, without looking at sustainability.

According to the "Handelsblatt", there are around 39,000 freelance sales staff who work with a license under Section 34f of the Trade Code and are not supervised by the Bafin but by the Chambers of Commerce.

The reason for this gap is a failure of EU policy, which apparently did not have these independent distributors on the list.

"We think that's absolutely unfortunate and confusing, but we have to live with it for now," said

, CEO of the free consultants of the AfW - Federal Association of Financial Services, the newspaper.

"We urge that this situation be stopped as soon as possible."

The Ministry of Economics also wants to "work for an extension of the advisory obligations to financial investment brokers," it says.

However, Wirth no longer expects this to happen this year.

Are there clear rules as to what is and isn't "green" investing?

Short answer: no.

With the taxonomy of the EU Commission in Brussels, there is a kind of catalog for climate-friendly investments.

However, this catalog shows how difficult it is to come to a common denominator on the subject.

After all, sustainability is very complex and many different aspects play into it.

This is already shown by the abbreviation ESG, which stands for environment, social affairs and corporate governance.

Each of these areas can be broken down into further sub-areas.

And every investor should have their own ideas about what is important to them and what is less important to them.

On the other hand, it is difficult to determine in general terms, especially for large corporations, how sustainable they are to be classified, because they have numerous different activities, in each of which different aspects of sustainability play a role.

Not to forget the business environment of the company, i.e. suppliers, regional political aspects or products.

Criticism of the EU taxonomy, for example, is that from January 2023 it is also considered climate-friendly to put money in certain gas and nuclear power plants.

Not only do many environmentalists find this wrong.

There are raising agencies specializing in sustainability that assess companies and provide investors with decision-making assistance.

However, analysts often come to completely different assessments of one and the same company - which is also of little help to investors.

In short:

.

According to bank president

, the financial sector takes the challenges very seriously.

"The financial industry is now using a lot of resources to ensure that what we call green is really green," said the Deutsche Bank boss in his capacity as President of the Association of German Banks (BdB) recently in an interview with the dpa news agency.

"All market participants are aware of how dangerous allegations of greenwashing are."

However, Sewing knows only too well what he is talking about: As head of Deutsche Bank, he heads the parent company of the fund company DWS, which is at the center of what is probably the biggest greenwashing scandal in this country to date.

When asked, the BVI fund association explained: “The fact that there is still no uniform understanding of what is sustainable, despite countless technical details and regulations, is actually a problem.”

According to the BVI, only European or international minimum standards can create more clarity: "This applies equally to ESG data, corporate reporting and requirements for sustainable products. That is why we are committed to such international minimum standards."

What should investors look out for in financial advice in the future?

While sustainability is a new aspect of investment advice, it is not the only one.

Investors should therefore make sure that, for all the complexity and novelty of the "green" topic, the conversation is not exclusively about it.

Risk diversification, for example, continues to be an important criterion that should by no means be neglected.

The same applies to the investment costs, which should be kept low.

"Be careful of the costs"

Finance Professor

, Frankfurt

"Pay attention to the costs," said finance professor

recently in an interview with the "FAZ".

"An experiment in the Netherlands showed that if customers wanted to invest sustainably, the bank advisors also selected the appropriate funds - but in the end the customers paid higher fees. Of course, this does not apply to all advisors. It's still the case above all important to deal with your finances, with or without outside help."

What is the background to the new requirements?

Politicians want to direct more money to where it benefits the climate and the environment instead of harming it, such as: climate protection, adaptation to climate change, sustainable use of water resources, transition to a circular economy, pollution prevention and protection of ecosystems and Biodiversity.

, and Germany wants to achieve this by 2045.

That means: from then on, gases that are harmful to the climate such as carbon dioxide (CO2) should be avoided or stored.

According to experts, the conversion of the economy from "brown" to "green" will only succeed if, in addition to public billions, private individuals also support it with their investments.

How popular have sustainable investments been so far?

The numbers show a clear upward trend.

According to the rating agency Morningstar, the volume of investment funds available worldwide with a sustainability label grew to 2.9 trillion dollars in the spring of this year, as manager magazin recently reported in a detailed report on sustainable investments using the example of the Dutch pension fund APG with its German sustainable finance expert

wrote .

The Global Sustainable Investment Alliance (GSIA), which is expanding its focus to include significantly larger groups of investors, recently even claims that it has identified a global volume of $35.3 trillion in sustainable investments.

That corresponds to a growth of 15 percent in two years.

For Germany, the Forum Nachhaltige Geldanlagen (FNG) put the total amount of sustainable investments as of December 31, 2021 at 501.4 billion euros.

That was almost 50 percent more than a year earlier.

The share of sustainable funds in the overall German market rose significantly within a year from 6.4 percent to 16.7 percent.

It is also clear, however, that so far institutional investors in particular have valued green investments.

According to surveys, private investors, on the other hand, consider the topic to be important, but have often placed more value on other qualities such as returns or security when making a specific investment.

This could change with the new advisory rules.

Critics, however, see the danger that financial institutions could try in the future to bring expensive, actively managed products to men and women under the ESG seal.

Will the new rules provide another boost?

"In surveys, most Germans have been saying for years that they find the topic of sustainability in investing really exciting. But they don't implement it," agrees Professor Klein from Kassel.

"I am convinced that if this is now actively offered to customers, we will get huge demand. It may be bumpy at first because the matter is complex. But I think that in the end many investors will not buy the 0815 fund, but something green."

However, the BVI fund association is skeptical that the demand can be met in every respect from now on: "In the beginning there will probably not be enough products to serve all conceivable customer preferences."

cr/dpa-afx