Time to tie ESG to Client Needs in Asian Private Wealth Management?

Video transcript

1. What has been the influence of the regulator in Europe on ESG?

In order to achieve the Paris-aligned goals that the governments all over the world have committed to, it is necessary to guide private investments towards the transformation of the economic system. In order to do that, the regulator has defined three kinds of categories for sustainable investments. They can be deferred into light green, medium green, and strongly green and the clients need to be asked as of August this year, whether or not they would like to invest sustainably, and if so, in which of those three categories and how much of their portfolio needs to be invested in those three categories. Now, one could say the increase of the sustainable investments or investments into the ESG products had a tremendous increase over the last five to seven years. And if you look at statistics, that is actually truly the case. However, if you have a closer look at the content of those products, you can see that a relevant proportion of that increase asset under management goes back to products which are not actually really ESG aligned. They are more greenwashing, as we know from literature and from the newspapers, is a growing topic over the last years.

2. How do current products suit private clients needs?

I think they hardly really suit the private client's needs. And that goes back to the topic of greenwashing, the development over the last years. Due to a lack of binding definition and standards in the area of each investing, the banks had a challenge that they needed to actually define those categories and definition of ESG investing themselves and they actually made quite use of that in a, I should say, opportunistic way. And that led to ESG products, which, how should I say were pretty much one-size-fits- all. So independent of the client needs, specific to ESG they sold those products to each client independent of their needs. And now they have to pay a little bit of bill, because the regulator as I said initially in the first question stepped in, and that also goes back to the greenwashing trends to limit those greenwashing ESG products and really assure that those private money flows by ESG investments really have an impact towards the transformation of our economic system.

3. Are private client advisers typically aware of how to have an ESG centric discussion?

I think for client advisors it's hard to have a really fundamental and good discussion with the client about ESG investments. That also relates to what I said earlier that those most product, ESG products are kind of one-size-fits-all, so they don't address specific needs of the clients. And if a client comes and says, for instance, he wants to have a product with impact on water quality, there's hardly any product really suiting that or matching that need of the client. And the client advisors are then forced into selling the client products they have on the product shelf, and they are not that specific and do not match the client's needs. They are, as I said, one-size-fits-all and whether the need is impact on water quality or on biodiversity or on climate, they sell those products all the same to the client.

4. How would you like to see this engagement evolve?

If I look at the development over the last years, I would propose that banks really talk to their clients, ask the clients for their specific needs. And I wouldn't do that in a normal client conversation. I would really contact them especially for that need and discuss their ESG needs with them. So that means banks should capture actually the client's needs, on a client-by-client basis in order to better understand what clients actually want if they ask for ESG investments. On the basis of that analysis, actually it needs, that the product shelf needs to be enlarged or enriched with products which are really matching those needs of the clients. So the client advisor can easily understand which products suits which needs, and then can advise really on a suitable product for the client’s needs and goals in terms of ESG.

5. How can they achieve that?

Well, if I look at Europe, the banks already, are required by the regulator now to capture the client's needs in terms of ESG, and then capture it into the CRM system. However, as I said before, the three categories defined by the regulator don't really mirror the actual needs of the client. It's a very technical definition, and the clients don't understand it nor do the relationship managers understand those definitions. Therefore, I think yes, the CRM system needs to be enriched by those needs, and those needs, it might sound complicated but it is quite strong evidence in science that those needs fall into three or four categories. Need one is, increase of financial return by ESG. There's not really strong evidence that correlates really remarkably. However, clients believe in that, and products do exist that support that, so that is one need. The products actually are not ESG products in a narrow sense. Those are return products, which should make use of ESG as a performance driver. The second category are then value-aligned products. That means if the client for instance, does not want to have investments in military equipment, they are excluded. The third, and that's the most complicated category, is impact or positive change. When the clients really want with their investments, achieve an improvement and impact on social or environmental aspects. That's the category where there are up to now, are really rarely any products that satisfy that client needs. And those three categories need to be discussed with the client, whether they have A, B or C. Or maybe a combination of all three or two of them. And then afterwards, it's actually much easier as up to now, to allocate the suitable product to the client with a specific need.