Attracted by the increasing demand for sustainable investment products, financial advisors are expanding their product offerings. However, before advising clients they must avoid common tripwires around training, product screening and reporting in order to avoid compliance risks.
According to the Swiss Sustainable Investment Market Study 2020, the volume of sustainable investments has grown tenfold between 2014 and 2018, from CHF 71 billion to CHF 717 billion. In 2019, the volume reached CHF 1.1 trillion. The majority of these assets are attributable to institutional clients, however, the growth in the retail investor segment has picked up considerably (last year sustainable investments attributable to retail clients has grown by 185%).
Not surprisingly, an increasing number of financial institutions are looking to offer sustainable investment to their clients. However, as financial institutions are currently reviewing their investment advice and portfolio management processes in the context of their implementation of the Financial Services Act (FinSA), consideration should also be given to the peculiarities of sustainable investments. Indeed, the Swiss Banking Association has published a guideline in June this year to provide guidance to financial institutions who are looking to advise clients on sustainable investments in compliance with their regulatory obligations.
When integrating ESG into a firm’s advisory process, it is essential to follow a holistic and cross-functional approach in order to avoid greenwashing or mis-selling. In practice, financial institutions are likely to experience challenges in the following four key areas.