ESG Considerations Within Wealth Management

Key reports in ESG history

In the early 2000s, the UN Global Compact produced its report Who Cares Wins – Connecting Financial Markets to a Changing World, written by UN Secretary-General Kofi Annan, with the support of the International Finance Corporation (IFC), urging the CEOs of significant financial institutions to take part in an initiative to integrate Environmental, Social and Governance (ESG) factors into capital markets. The said report effectively coined the term ‘ESG’. At the same time, the United Nations Environment Programme Finance Initiative (UNEP FI) produced the so-called Freshfields Report, which showed that ESG factors were relevant to financial valuation and thus a fiduciary duty, representing long-term investment value drivers. These two reports formed the backbone for the launch of the UN Principles for Responsible Investment (PRI) in 2006.

In 2015, Mark Carney, then Governor of the Bank of England and Chairman of the Financial Stability Board (the international body set up by the G20 to monitor risks to the financial system), recognising the change in profile of key risks to the economy, referred to this challenge in his speech, Breaking the Tragedy of the Horizon – Climate Change and Financial Stability. The said speech became the cornerstone for the consideration and integration of risks related to climate change by financial regulators.

ESG today within Wealth Management

The emphasis on ESG continues to grow rapidly with the new ESG regime in investment services (via MiFIDII amendments), reflecting a concrete step towards a more sustainable financial ecosystem. The said new ESG regime requires determining clients’ ‘sustainability preferences’ in conjunction with suitability assessments within investment advice and portfolio management processes, based on ESG-related criteria, definitions, considerations and disclosures introduced by EU Taxonomy and SFDR regulation.

The Wealth Management Division of Eurobank Cyprus, as a provider of investment advisory and discretionary portfolio management services, incorporates the aforesaid ESG regime into its advised services, operations and processes and gradually implements relevant enhancements in accordance with regulatory developments.

Changes to investment advice service processes

The new ESG profiling process initially involves asking clients (investors) to declare whether they are interested in investing sustainably. Subsequently, for those interested in ESG investing, additional ESG-related information is provided by Wealth Management, followed by a separate questionnaire to identify their individual ‘sustainability preferences’. The aim is to match these preferences with appropriate investment guidelines and portfolio strategies, to ensure that recommendations to be given are to reflect both the financial objectives and any sustainability preferences expressed by those clients.

New Key Concepts & Terminology

Sustainability Risk: An ESG event or condition which, if it occurs, could cause an actual or a potential material negative impact on the value of the investment.

Sustainability or ESG Factors: Environmental, social and employee issues, respect for human rights, anti-corruption and anti-bribery matters.

Principal Adverse Impacts (PAIs): The impacts of investment decisions and/or investment advice that result in negative effects on sustainability factors.

Sustainability Preferences: Clients’ or potential clients’ choices as to whether (and if so to what extent) they wish to have their sustainability perspectives integrated into their investments, expressed in one or more of the following options:

• a minimum proportion of environmentally sustainable investments as defined by the EU Taxonomy;
• a minimum proportion of sustainable investments as defined by the EU SFDR;
• the consideration of PAIs on sustainability factors, from a qualitative and/or quantitative perspective.

Next steps

In view of the evolving global ESG challenges, unfolding in complex ways, Wealth Management continues its ongoing efforts on further enhancements of its ESG framework and methodologies.

By Foula Papageorgiou, Head Wealth Management Middle Office, Eurobank Cyprus

(Photo by Taspho)

(This article first appeared in the 2024 edition of The Cyprus Journal of Wealth Management, commissioned by Eurobank Cyprus and published by IMH. Click here to view the article. Click here to view the entire magazine online.)