Your sustainability preferences: what changes for your investments

From 2 August 2022, your financial adviser will have to take into account your sustainable investment wishes, known as your ‘sustainability preferences’, when giving advice. What is it about?

Financial advisers are required by regulation to consider the objectives and financial situation of their clients before recommending an investment. This is the purpose of the questions they ask you regularly, before offering a financial investment.
From August 2, 2022, they will also need to consider your sustainability preferences. This obligation applies to all bank advisors. It will also apply to wealth management advisers with the status of “financial investment adviser” (CIF) from 1er January 2023.

What are “sustainability” preferences?

Being interested in the sustainability of a financial investment means paying attention to its environmental and social consequences, respect for human rights and the fight against corruption. These so-called “extra-financial” criteria are also called “ESG” criteria for the environment, social and governance. They can be taken into account to select the companies most able to respond to the challenges of sustainable development and to your questions. For example: “Will my money finance solutions to climate change? or “Can my savings have a negative impact on the environment? “.

From August 2, 2022, your advisor will have to assess your sustainability preferences to recommend investments suited to your profile. It will determine your preferences according to 3 axes:

  • The proportion of your investment that you want to see invested in activities considered sustainable for the environment by the European classification called “Taxonomy” (or taxonomy);
  • The proportion of your investment that you want to see invested in “sustainable investments” within the meaning of the European Regulation on sustainability reporting in the financial services sector (SFDR);
  • How “key negative impacts” (for example, greenhouse gas emissions, hazardous waste, human rights violations, etc.) are considered by your investment.

Your preferences can be assessed at the level of a financial investment or with respect to your entire portfolio.

What questions will your counselor ask you?

In concrete terms, your advisor might ask if you want, for example:

  • support a particular environmental goal such as the preservation of biodiversity,
  • invest all or part of your savings in certain sectors of activity such as renewable energies,
  • completely exclude certain sectors of activity, such as fossil fuels, or accept that a certain percentage of your investments finance these activities,
  • make sure that your investment does not have a negative impact on the fight against climate change.

From one financial intermediary to another, the questions aimed at knowing your preferences regarding sustainability may be different.

If you decide to express sustainability preferences, your advisor should take this into account before offering you a financial investment.

Note: in the event that no investment available to your advisor meets your sustainability preferences, which could happen initially, he will suggest you to adapt your initial preferences, which must be recorded in writing, to be able to recommend an investment.

To respond to your advisor and benefit from advice that best meets your expectations regarding sustainability, it is therefore essential to understand well what these 3 axes cover.

What is the European “Taxonomy”?

To limit the greenwashing or “greening of facades” of financial products, the European Union has established a precise list of sustainable economic activities for the environment. To determine whether a given economic activity can be considered sustainable, the Taxonomy is based on 6 environmental objectives:

An economic activity is considered “eligible” for the Taxonomy if it appears on the list of activities selected in this phase by the European Commission as likely to make a substantial contribution to any environmental objective.
An economic activity is considered “aligned” with one of the 6 environmental objectives of the Taxonomy if it contributes significantly to one of the objectives, without harming the other 5, while respecting minimum guarantees of respect for human rights.

This classification system makes it possible to identify “green” activities and to measure the “green” part of a company’s activities. Let’s take two examples:

1. Electricity production with solar panels

  • Solar panels make it possible to produce electricity without emitting CO2which is very positive in the fight against climate change.
  • However, to demonstrate that its business is green, the company must also ensure that it meets other criteria. For example: solar panels are made with the most recyclable components possible, their installation should not have a negative impact on biodiversity.

2. The construction of a building

  • To be “green”, a building must consume as little energy as possible to limit CO emissions.2 linked to its use (heating, air conditioning, etc.).
  • In addition, the building must meet other requirements related to, for example, its water consumption, its location or the materials used for its construction.

Today, the Taxonomy takes into account 90 economic activities. These represent 80% of direct CO emissions2 in the European Union. As time goes on, more and more activities will be covered by the Taxonomy (therefore “eligible”), for example agriculture. However, some activities are not intended to be included in the Taxonomy:

  • Those that do not have a significant impact on the climate and the environment, for better or worse. These are mainly services (for example: accountants, media, hairdressers);
  • Those that are considered in principle too harmful for the climate and the environment (for example: the production of electricity from coal).

You must therefore define the proportion of your investments that you want to be “aligned” with this Taxonomy.

For example: Elsa wants 15% of her investment to be aligned with the Taxonomy and take into consideration the main negative impacts, without specifying which impacts or in what proportion. For his advisor to take into account this goal, he will indicate to him that 15% of his investment will have to be aligned with the Taxonomy, and that the main negative consequences are important for her.

Elsa's profile illustration

Please note: the criteria for alignment with the Taxonomy are very precise and demanding. Since the companies have just started to provide information on this subject, it is to be expected that the alignment percentage will be, especially initially, very low.

What are “sustainable investments” in the sense of the “SFDR” Regulation?

The European Union has created rules to oblige financial professionals to be more transparent about ESG issues that they consider or not in the design of investments in which you can invest (funds in particular). These are rules on the disclosure of sustainability information (“ Sustainable Finance Disclosure Regulation or SFDR in English).

A “sustainable investment” is defined as an investment in an economic activity that contributes to an environmental or social objective, without causing significant damage to other environmental or social objectives, ensuring that the business in which the investment is made investment applies good governance practices. (sound management structures, staff relations, compliance with tax obligations, etc.).

An investment can be composed of 0% to 100% sustainable investments.

Please note: a “sustainable investment” is not necessarily an investment that meets the criteria of the Taxonomy. There are no economic activities concerned or not by the SFDR Regulation, nor specific criteria to assess the environmental or social impacts of a sustainable investment.

You must therefore define the part that “sustainable investments” represent in your investment.

For example: Mark wants half of his investment to be in sustainable investments. In order for his adviser to take into account this goal, he must indicate precisely.

Marc's profile picture

What are the “main negative impacts”?

The main negative impacts (“ main opposite impact or PAI) are the most significant negative impacts of investments on the environment, at the social level and the treatment of employees, in terms of respect for human rights and the fight against corruption. It should be considered at two levels:

  • At the level of the asset management company: it must publish information on the integration or not of the main negative impacts in its investment decisions, and specify what is implemented to mitigate.
  • At the investment level: the management company must specify if the investment takes into account the main negative effects and, if so, how.

That is to say: professionals are free to determine how to take into account these main negative effects for the investments they sell. These impacts can be particularly in greenhouse gas emissions, water management, forced labor, etc.

You must therefore indicate whether you want your investment to take into account its main negative impacts, possibly specifying the type of negative impact and/or a degree of consideration.

For example: Agathe wants her investment to take into account the main negative impacts, especially in terms of greenhouse gas emissions generated by the companies she holds in her portfolio. For his advisor to take into account this objective, he must indicate to him that his investment must take into account the main negative effects, and specify the greenhouse gases.

Agatha's profile illustration

Now you know more about the new sustainability questions your advisor will ask you before recommending an investment. Do you want to invest in investments in line with your values? Get ready!

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