The Climate Finance Product Scanner for retail investors and banks (KliFin-Scanner) is developing a questionnaire on non-financial objectives for retail investors. The questionnaire will enable retail investors to create an investment profile based on their individual extra-financial objectives. This can then be matched to financial products. The questionnaire and matching software will be integrated in a website available to all retail investors in Germany. It will be open-source and available as a white label solution that can be integrated into banks’ infrastructure. The project run-time is from 1 January 2018 to 30 June 2020.
Non-financial objectives are critical for consumers, as retail investors and in their role as pension and insurance beneficiaries. A survey of Natixis shows that roughly 70% of individuals in Europe want their investment portfolios to reflect these objectives. To date, however, these non-financial objectives are poorly profiled in retail and pension markets, and not necessarily integrated into portfolio mandates.
This dynamic is now shifting. Pension funds are increasingly looking to reflect non-financial objectives in their mandates. The EU High-Level Expert Group on Sustainable Finance recommended a range of reforms on this topic, notably related to the rules around bank and robo-advice, as well as the information required in Key Information Documents (KIDs). The European Commission took these recommendations up in their recently published action plan for sustainable finance. Many of these issues have also been flagged by the 2° Investing Initiative (2°ii) in our 2017 report Non-Financial Message in a Bottle.
In this context, the 2°ii launched a 2-year project to build a quantitative client profiling software on non-financial objectives and associated platform that can be used by banks and consumers to translate their non-financial objectives into investment beliefs and strategies.
The project involves the following elements:
- An open-source client profiling questionnaire for non-financial objectives. 2°ii will build a client profiling questionnaire for non-financial objectives. The questionnaire will create a unique identification system that allows for a matching of non-financial objectives with funds. The questionnaire will be integrated into a software that allows users to print their individual client profile as a one-page factsheet. The questionnaire will be designed and adapted to be compliant with the expected MiFID II revisions. All outputs will be IP-rights free, allowing for integration by banks and other stakeholders into their systems.
- A fund-matching software that matches funds to client profiles. As a second step, 2°ii will build a fund-matching software that allows for the matching of funds in terms of their compatibility with different client profiles. The software is designed to work seamlessly with the questionnaire. Both the matching software and the questionnaire will be available to retail investors and banks alike on a non-commercial informational website. The analysis will build on the 2°C scenario tool developed by the 2° Investing Initiative and applied by over 1,000 financial institutions to date. The tool allows for a granular assessment of the portfolio to a range of high-carbon and low-carbon technologies and assets, as well as its alignment with a 2°C scenario. The granular assessment framework is consistent with creating granular client profiles (e.g. a client seeking a nuclear-free, low-carbon strategy vs. a low-carbon strategy involving nuclear power; a client emphasizing a fossil-free strategy vs. a ‘green’ strategy; a client seeking simply to align with the 2°C climate goal vs. a client seeking an impact-oriented strategy that influences companies). The assessment can also integrate other sustainability criteria and data such as board diversity, armaments, and tobacco. The software source code, methodology, and any related documentation will be made publicly available.
- An engagement/ white label tool. The outputs can be used by market actors across a range of use cases:
- Software for pension funds to profile the non-financial objectives of their beneficiaries and to directly link the results with investment mandates and underlying strategies. Results could allow pension funds to develop blended strategies consistent with the preferences of their beneficiaries or motivate divestment decisions. This application can be implemented jointly with a bank to directly connect the dots to the investment strategy.
- Software for banks to use in their retail banking business to allow frontline advisors to identify the non-financial objectives of their clients and match these to their fund offering. The software can be applied directly to or together with the client.
- An online robo-advisor for retail investors to apply independently and inform investment decisions and / or their dialogue with their banks or robo-advisors.
Information about the project in German can be found here.