Insurers neglect duty of ESG advice –

Insurers neglect ESG advisory requirements

ESG is often neglected in insurance consulting

ESG is often neglected in insurance consulting

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Intermediaries must actively address sustainability preferences in financial investments. But very few follow this pattern

Since August 2 this year there is no way around it, at least on paper. Advisors are now required to ask their clients about their sustainability preferences when it comes to investing. This query is an integral part of what is known as the Insurance Distribution Directive (IDD). But three months after its presentation, the conclusion is sobering: according to a joint analysis by consultancy EY and software company Bao, 78% of brokers do not address their clients’ sustainability preferences in the consultation. Why is that and how should the query actually work in practice?

“The required content and the scope of the preferred consultation are defined in the IDD and open the door for the further course of discussion in the ESG consulting process,” says Patrick Pfalzgraf, partner at EY EMEIA Financial Services. Questionnaires such as the ESG module to consult sustainability preferences, which has been adopted by the DIN committee “Financial Services for Private Households”, are a guide. It is part of DIN 77230 “Basic financial analysis for private households”, but can also be used separately. The Define Institute for Financial Standards makes the questionnaire available to advisers on its website. The stated goals: structure the query of preference and enable a simple, targeted query process that also serves as proof of documentation.

Information on how and, above all, what consultants should consult is basically available. Despite this, ESG plays no role in four out of five cases. As part of its “mystery shopping study”, EY experts conducted a total of 85 telephone and online inquiries with intermediaries from 13 insurance companies. His main focus was on the quality of advice in the area of ​​sustainable investments. The disappointing finding: in 95 percent of the discussions, the level of knowledge on the topic of sustainability was not asked, and 65 percent of the documents submitted did not contain any information on sustainable products. “Sustainability tends to be avoided, apparently for various reasons,” says Pfalzgraf. “The fact that a large part of the industry does not comply with an applicable law is certainly not intentional.”

But what is the reason then? The fact that there are no official and uniform definitions for ESG criteria yet seems to be a major problem for many consultants. In the financial world, the abbreviation has generally been established for the areas of environment (E), social affairs (S), and corporate management (G). However, it is not always completely clear what the individual points mean in detail. What exactly does sustainable management mean, what does good corporate governance mean? If you do not want to get into trouble during the consultation, you must formulate carefully.

gaps in the knowledge of intermediaries

The DIN committee suggests the following question to start with: “Do you need basic information about the sustainability goals of the European Union when investing money and capital and about the possibility of formulating sustainability preferences?” If the answer is yes, consultants can find in the online catalog DIN Proposed Explanations of the EU Sustainability Goals, the Green Deal and the EU Taxonomy.

If green knowledge is available, the next step is to get to the heart of the matter: should sustainability be considered when investing? If the answer is no, the consultants have already fulfilled their obligation to carry out a sustainability survey. If the answer is yes, mediators must determine the “what” and “how”, establish thematic approaches and establish priorities. The DIN catalog also helps here: What minimum proportion should flow to the environmental goals (E) and what to the social goals (S)? Should they invest only in sustainable companies? What individual themes are important to investors? And which areas should be completely excluded from investment?

“If there are no ESG-compliant investment products to sell or the provider has not made a corresponding classification, the intermediaries are of course up in the air,” adds Pfalzgraf. The general problem, however, is deeper. Often the knowledge on the part of the intermediary for dedicated sustainability advice is not yet available. A short-term solution is the establishment of sustainability competence centers. “Customers interested in sustainability can turn to specialized sales units or certified sustainability consultants in the respective organization,” says Pfalzgraf. “In the medium term, however, there is no way to avoid intensive and recurring training for all placement staff.”

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