It appears that European wealth managers are not clear about what they must do regarding ESG when applied to the financial rules under which they operate.

A study of 210 European wealth managers, collectively overseeing €3.2 trillion ($3.51 trillion) of assets under management, finds that many of them do not fully understand ESG requirements under EU financial rules.

Behavioural finance organisation Oxford Risk said more than one in 12 (13 per cent) wealth managers said they don’t know what the directives on sustainability assessments are or are unsure they understand them. 

“It’s concerning just how many wealth managers still are not entirely up to speed with MiFID II requirements, given how long it's been in force,” James Pereira-Stubbs, chief client officer, Oxford Risk, said.

In August 2022, a change to the Markets in Financial Instruments Directive II (MiFID II) required investment advisors and portfolio managers to incorporate clients’ sustainability (or ESG) preferences into their suitability assessments. First outlined by the European Securities Market Authority (ESMA) in 2021, the new rules apply to all forms of investment advice as well as portfolio management. (This article examined uncertainties on how, if at all, these rules affect the UK after its departure from the EU.)

Some 38 per cent of managers are fully aware of and strongly understand EU directives on ESG assessments. Around 90 per cent of managers agree that establishing sustainability preferences is one of the most important tasks when onboarding a new client. However, all too often these sustainability assessments and processes are not providing insightful or detailed enough information to base future decisions on, the report’s authors wrote.

Such findings highlight how ESG investment ideas are being increasingly embedded into the financial rules governing financial markets, even though ESG remains controversial in countries such as the US, heightened by the 2022 surge in energy prices, aggravated by the Russian invasion of Ukraine in February 2022, and other forces. (See an article here on views about ESG pushback.) Another concern is over boundaries and terminology: The EU has changed its taxonomy for “green” energy to include natural gas – putting it at odds with hard-line Green activists. 

Oxford Risk surveyed wealth managers in France, Germany, the Netherlands, Spain, Italy, Switzerland, and the Nordics during July 2023

In other findings, the report said that despite being integrated into MiFID II requirements, fewer than one in five (17 per cent) wealth managers “strongly agree” that their firm has successfully incorporated a method of establishing a client’s sustainability preferences into their processes. 

The research found that many are unable to do this without the right tools and software. Only one in four (26 per cent) “strongly agree” that they have access to the right tools or software to assess an investor’s sustainability preferences effectively. 

The study found that European wealth managers rely too much on their own intuition and clients’ own self-assessment of their suitable risk level. Around three out of four (75 per cent) admit that they largely rely on clients to tell them what their suitable risk level is.