Dutch Authority Calls for Better Alignment Between Investor Sustainability Goals & What They’re Sold

Key Takeaways

• Investment Firms’ Responsibility: Firms must take a more active role in aligning client sustainability preferences with the true features of investment products.
• Progress So Far: Improvements are being made in the execution-only customer journey and how sustainability is explained during suitability assessments.
• Governance Expectations: Sustainability objectives must be clearly defined in product oversight and governance to avoid products mismatching client expectations.
• Detailed Client Information: Firms must collect sufficiently specific sustainability preferences, including minimum proportions where relevant.
• Ongoing Regulatory Pressure: The AFM expects continued effort despite challenges, reinforcing that compliance with sustainability requirements is not optional.

Deep Dive

Investment firms are making progress weaving sustainability into investment decision-making, but many still aren’t connecting the dots between what clients want and what they actually end up holding. That’s the latest from the Dutch Authority for the Financial Markets (AFM), which says firms need to improve how they align investor sustainability preferences with the true characteristics of investment products.

After reviewing six investment firms, the regulator delivered a cautiously optimistic verdict. Firms are getting better at explaining sustainability within the suitability assessment and designing the execution-only customer journey with ESG in mind. But to ensure investors’ values are accurately reflected in their portfolios, more precision is required.

Nearly half of investors now pay attention to sustainability when choosing products. The AFM notes that firms are uniquely positioned to guide them, and they understand preferences, translate them into product decisions, and help navigate an increasingly complex ESG market. Getting that right builds trust and brings commercial upside.

The AFM said efforts to improve the way sustainability is addressed in suitability assessments are evident across the firms surveyed. It also sees strong development in how sustainability is incorporated into the execution-only digital experience. These are positive early steps.

Improvements Still Needed in Target Market and Preference Collection

Where gaps remain, the regulator says, is in Product Oversight and Governance (POG). Investment firms need to be clearer in defining sustainability objectives when setting their (negative) target markets to avoid clients with sustainability preferences ending up in “grey” products.

The AFM urged firms to structure both their product governance and client questionnaires around the three legal sustainability preference categories:

• Taxonomy-aligned investments
• Sustainable investments under the Sustainable Finance Disclosure Regulation (SFDR)
• Investments that consider principal adverse impacts (PAIs)

Firms must also collect more detailed information about clients’ ESG preferences, including minimum proportions of qualifying investments where relevant.

Intent isn’t enough, the watchdog stressed. ESG suitability must be backed by concrete data.

Sustained Effort Required Despite Industry Challenges

The AFM recognizes that evolving sustainability requirements bring operational challenges. Still, it expects firms to keep raising the bar and strengthening both preference-collection and product-feature documentation.

To assist that progress, the regulator has released a new ESG update with detailed guidance, examples of good practices, and a factsheet, “Collecting sustainability preferences: how it works”, to support firms in their client discussions and assessments.

In short, improvement is happening, but the AFM wants firms to move faster.

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