Sustainable finance is rapidly gaining traction, and more investors want to align their portfolios with their personal values. Whether you're passionate about environmental conservation, social issues, or responsible corporate governance, sustainable investing allows you to make choices that go beyond financial returns. But how do you start the conversation with your financial advisor about sustainable investments?

In this article, we’ll walk you through the key steps and advice to ensure that your next meeting with a financial advisor leads to an investment strategy that reflects your sustainability preferences.

Why Sustainable Investing Matters More Than Ever

Since August 2022, a significant change has reshaped the financial advisory landscape. The European Commission made it mandatory for financial advisors to ask their clients about their sustainability preferences. This regulation is a game-changer because it empowers investors like you to incorporate environmental, social, and governance (ESG) criteria into your investment decisions.

So, what does this mean for you? It means that when you seek financial advice, your values and sustainability goals should be just as important as your financial ones. By clearly communicating these preferences, you can ensure your investments are contributing to a more sustainable future.

How Financial Advisors Assess Your Sustainability Preferences

When you meet with your financial advisor, they should follow three key steps to identify your sustainability profile:

1. Explaining Sustainability Preferences

Your advisor should start by explaining the various categories of sustainability preferences. This foundational step ensures that you’re equipped with the right knowledge to make informed decisions. It’s crucial that you fully understand the different ways in which your investments can impact the environment and society.

2. Asking the Right Questions

Once the basics are covered, your advisor will ask targeted questions to gauge your sustainability preferences. This assessment will include understanding your views on environmental protection, social responsibility, and corporate ethics. The aim is to capture a comprehensive picture of your values, so your advisor can recommend investments that resonate with you.

3. Proposing Suitable Solutions

Finally, based on your preferences, your advisor will suggest suitable investment products that align with your sustainability profile. These could range from green bonds to ESG-focused mutual funds. It’s in this step that your sustainability goals get translated into concrete investment choices.

Understanding the Three Categories of Sustainable Financial Products

So, what are the categories of financial products that cater to sustainability preferences? Let’s break them down:

1. Financial Products Aligned with the EU Taxonomy

These are investment instruments that directly support economic activities adhering to the EU Taxonomy Regulation—a classification system that identifies environmentally sustainable activities. This category is ideal for investors who want to ensure their capital supports initiatives that meet strict environmental criteria, such as renewable energy projects or circular economy models.

2. Financial Products Using Broader ESG Criteria

This category includes financial products that apply social and environmental criteria beyond the EU Taxonomy’s current focus on climate. For example, these products might prioritize companies that promote gender equality, social inclusion, or fair labor practices. This option is suitable if you want a more holistic approach to sustainability that goes beyond environmental factors.

3. Financial Products Addressing Negative Impacts

These instruments consider activities with potentially harmful impacts on the environment or society. You have two options here:

• Exclusion: Choosing products that exclude companies involved in controversial activities like fossil fuels or high water usage.
• Engagement: Opting for products where fund managers actively engage with companies to reduce their negative impacts.

If you’re a value-oriented investor, exclusion might be your preferred route. But if you’re impact-oriented and want to drive change from within, look for products with a strong engagement strategy.

Challenges and Pitfalls to Avoid

While the legislative framework for sustainable investing is promising, there are still a few hurdles to overcome. Here are two common pitfalls to watch out for:

1. Lack of Proactive Engagement from Advisors

In many cases, financial advisors may still not ask about your sustainability preferences. They might either overlook this requirement or lack the knowledge to guide you effectively. To avoid this, be proactive and initiate the conversation. Clearly express your desire for sustainable investment options and make sure your preferences are documented.

2. Lack of Expertise in Impact Investing

Most financial advisors are trained in traditional finance but lack expertise in impact investing. If you’re specifically interested in impact-oriented products, you need to be extra prepared. Arm yourself with knowledge and, if needed, listen to resources like our “MyFairMoney – The Impact Investing Podcast” to deepen your understanding before the meeting.

The Road Ahead: Bridging the Gap Between Theory and Practice

While it’s encouraging to see sustainable investing gaining more recognition, there’s still work to be done to translate these principles into widespread practice. Many financial institutions have yet to develop products that fully address all aspects of sustainability, especially beyond climate-related goals. As an investor, you can play a crucial role in accelerating this change by demanding more comprehensive solutions that cover the entire spectrum of environmental and social impacts.

Final Thoughts: Make Your Voice Count

If there’s one piece of advice to remember, it’s this: Be vigilant, stay informed, and let your sustainability goals guide your investment decisions. The power to shape a sustainable future lies in your hands, and it starts with communicating your values clearly to your financial advisor.

Need more support to prepare for your next financial advisory meeting? Visit MyFairMoney.eu for additional resources and information. We’ve got a wealth of content designed to help you make informed choices that reflect your sustainability goals.

Now that you’re equipped with the basics, you’re ready to take the next step. If you have any questions or need a refresher, feel free to revisit our resources or listen to our podcast for more insights. Let’s build a sustainable future together—one investment at a time.

(Written with the assistance of Chat GPT.)