Help the investor in search of sustainable investments

SUPERVISORY REPORT
Help the investor in search of sustainable investments

In brief
Financial firms must better assist investors in their search for sustainable investments. This is important because approximately half of investors pay attention to sustainability. Product Oversight & Governance (POG) and the suitability assessment form the basis for a suitable product offering, for accurately capturing investors' sustainability preferences, and for matching demand and supply. Although this is complex for firms, it contributes to investors being able to contribute to the transition to a more sustainable economy through their investments.

SUPERVISORY FACTSHEET
Help the investor in search of sustainable investments

In brief
Financial firms must better assist investors in their search for sustainable investments. This is important because approximately half of investors pay attention to sustainability. Product Oversight & Governance (POG) and the suitability assessment form the basis for a suitable product offering, for accurately capturing investors' sustainability preferences, and for matching demand and supply. Although this is complex for firms, it contributes to investors being able to contribute to the transition to a more sustainable economy through their investments.

Product Oversight and Governance (POG)
Integrate sustainability preferences into POG policy.

Suitability Assessment
Evaluate the product offering and prevent a mismatch.

? Use understandable language and align with the investor's experience.
Ask for sustainability preferences carefully and in depth.

Approximately half of investors pay attention to sustainability. Financial firms must better assist them in their search for sustainable investments.

Product oversight & governance (POG) and the suitability assessment contribute to investors gaining better access to products that match what they want to achieve in terms of sustainability.

1. Integrate sustainability preferences into POG policy.
2. Evaluate the product offering and prevent a mismatch.
3. Use understandable language and align with the investor's experience.
4. Ask for sustainability preferences carefully and in depth.

Our key points:

SUPERVISORY REPORT
Table of Contents
Summary 3

1. General 5
   1.1 Expansion of POG and suitability standards to stimulate the sustainability transition 5
   1.2 Scope of the research 5
   1.3 Follow-up 5
   1.4 Guide 6
2. Investment Firms 7
   2.1 Market overview 7
   2.2 To what extent do investment firms incorporate sustainability into their product distribution? 8
   2.3 To what extent do investment firms incorporate sustainability into the suitability assessment? 11
3. Life Insurers 18
   3.1 Market overview 18
   3.2 To what extent do life insurers incorporate sustainability into POG? 18
4. Research Methodology 21
   4.1 Self-assessment with questions on sustainability provisions 21
   4.2 In-depth conversations on concrete steps 21
   4.3 Limitations of this research 21

Help the investor in search of sustainable investments 3 SUPERVISORY REPORT Summary 1 For investment firms: Article 32b of the Decision on Conduct Supervision of Financial Firms. For life insurers: Delegated Regulation (EU) 2017/2358.
2 Delegated Regulation (EU) 2017/565.

The AFM has obtained an initial picture of the extent to which investment firms and life insurers have integrated sustainability provisions into their Product Oversight & Governance (POG)1 and suitability assessment2 through a self-assessment. The results show that many parties are already taking steps to incorporate sustainability into policy and products. At the same time, there is still much room for improvement.

Approximately half of investors pay attention to the sustainability of their investments, as shown by the AFM Consumer Monitor. POG and the suitability assessment are the basis for a suitable product offering, for accurately capturing investors' sustainability preferences, and for matching demand and supply. This allows investors, who wish to do so, to contribute to the transition to a more sustainable economy through their investments. Below is described what steps the sector is already taking and what movement the AFM expects. The AFM focuses on what it considers the most important and pressing issues.

Use understandable language and align with the investor's experience Almost all investment firms state that they explain sustainability to customers when conducting the suitability assessment. This is a positive outcome. However, these firms can do more to make the explanation more understandable and align it with the investor's experience. This will enable them to better capture the investor's sustainability preferences. This applies especially to the small group of investment firms that states they do not provide (additional) explanation on sustainability.

Two-thirds of investment firms estimate that currently only a maximum of 10% of investors provide sustainability preferences. This is a significant difference compared to the AFM Consumer Monitor, in which approximately half of investors state they pay attention to sustainability. A major cause may be that the explanation regarding sustainability in the suitability assessment is currently so complex that customers choose not to provide sustainability preferences.

The AFM therefore expects investment firms to improve their explanation of sustainability. This can be done, for example, by sending a clarification in advance and by testing whether that information is understandable.

Ask for sustainability preferences carefully and in depth In addition to language use, it is important that investment firms reflect more on the specific sustainability preferences of the investor. They must probe deeply into the definition of specific sustainability preferences, such as the minimum percentage that must be invested sustainably or the most important adverse effects that must be considered. This is currently done too little, despite it being a legal requirement.

For example, 15% of investment firms do not ask their investors to specify sustainability preferences. Approximately half of the investment firms that do ask about specific sustainability preferences do not offer their investors the possibility to provide a minimum percentage or the most important adverse effects for them. These investment firms therefore have insufficient insight into the investor's sustainability preferences.

Help the investor in search of sustainable investments 4 SUPERVISORY REPORT A careful inquiry is important because it forms the basis for determining the suitability of the investment and preventing a mismatch. The AFM therefore expects these investment firms to align their inquiry with legislation and pay more attention to the specific sustainability preferences of customers.

Integrate sustainability factors into POG policy The self-assessment shows that most investment firms and life insurers have expanded their POG policy with sustainability factors. They describe the sustainability objectives of the target group. For example, by using ESG criteria or other sustainable characteristics of investments, so that the sustainable characteristics of the product align with the target group. The AFM expects firms that have not yet adapted their POG policy to sustainability factors to take action.

Evaluate the product offering for sustainability and prevent mismatch The AFM expects firms to evaluate their product offering for sustainability characteristics and make necessary changes. Two-thirds of investment firms already do this. Incorporating sustainability characteristics can lead to adjustments in the target group. This also applies to the negative target group. Products without sustainability characteristics must not be sold to investors who want to invest sustainably.

However, less than half of investment firms state that they have policy to prevent such a mismatch. The AFM explicitly requests attention for this.

Follow-up
The AFM calls on the sector to embed sustainability provisions in their POG policy and to make sustainability in the suitability assessment more understandable and careful. In this way, firms support investors in their contribution to the transition to a sustainable economy. And the sector makes (even) greater use of its strength within the sustainability transition. Firms can do this based on their self-assessment and the guidelines provided in this report.

The AFM has not conducted independent research into the accuracy of the answers given, nor has it investigated the quality or execution. That will happen later this year. The AFM will then conduct more in-depth research into compliance with the sustainability provisions in POG and the suitability assessment at a number of investment firms. This research is part of a Common Supervisory Action (CSA) coordinated by ESMA.

Help the investor in search of sustainable investments 5 SUPERVISORY REPORT

1. General
   3 Article 2, seventeenth paragraph, Directive (EU) 2016/97.

To stimulate the sustainability transition, the existing POG and suitability standards for investment firms and insurers have been expanded since 2022. Sustainability factors are now part of POG and the suitability assessment. This should lead to investors gaining better access to a product offering that fits their sustainability objectives. In this way, investors can contribute to a sustainable society with their investments.

1.1 Expansion of POG and suitability standards to stimulate the sustainability transition
Investment firms and insurers (including insurance intermediaries) must take sustainability into account when developing and distributing financial products. Investment firms and advisors of an insurance with an investment component3 must also take the investor's sustainability preferences into account when conducting the suitability assessment. This allows investors to gain better access to products that match their sustainability objectives. The Guidelines of the European Securities and Markets Authority (ESMA) for POG and the suitability assessment were adjusted on October 3, 2023.

1.2 Scope of the research
The AFM conducted a self-assessment among 114 investment firms and nine life insurers regarding compliance with the sustainability provisions in POG. Additionally, a self-assessment was launched among 97 investment firms regarding compliance with the sustainability provisions in the suitability assessment. This is the AFM's first research into compliance with these sustainability provisions.

The research shows where firms are already on the right track and where improvement is needed. The self-assessment also provides firms with individual insight into their compliance status and what steps they still need to take to give investors better access to a suitable sustainable product offering.

The results in this report are based on self-reporting by firms. This means the AFM has not conducted independent research into the accuracy of the answers given. Furthermore, the self-assessment primarily asked about the presence of policy or processes. The result does not provide insight into the quality or execution of these.

Chapter 4 contains more information about the research methodology.

1.3 Follow-up
This research indicates that most investment firms and life insurers have already taken steps to implement the sustainability provisions in their POG and suitability assessment. The AFM expects investment firms and life insurers to use the findings in this report to further improve their POG and/or suitability assessment where relevant.

ESMA has announced that it will conduct a Common Supervisory Action (CSA) in 2024 regarding the integration of sustainability provisions concerning POG and the suitability assessment for investment firms. A CSA means that European national supervisors simultaneously conduct research on the same topic. The AFM is one of the participating national supervisors in this CSA.

Help the investor in search of sustainable investments 6 SUPERVISORY REPORT The AFM will select a number of investment firms for this research later this year. In the CSA, the AFM will look more deeply into compliance with the sustainability provisions than in the current research.

1.4 Guide
Chapter 2.1 shows the market overview of investment firms. Chapter 2.2 describes to what extent they incorporate sustainability into POG, and Chapter 2.3 into the suitability assessment. Chapter 3.1 gives a market overview of life insurers, and Chapter 3.2 states to what extent they have incorporated sustainability into POG. Finally, Chapter 4 describes the research methodology.

Help the investor in search of sustainable investments 7 SUPERVISORY REPORT
2. Investment Firms
4 Investment firms can offer multiple services, therefore the percentages add up to more than 100%.

Most investment firms have taken steps to integrate sustainability into their POG policy and in the execution of the suitability assessment. However, there is still much room for improvement. For example, more investment firms must evaluate their product offering and adjust it where necessary. Also, the determination of the negative target group, to whom products must not be sold, is still insufficient. Products without sustainability characteristics must not be sold to investors who want to invest sustainably.

Additionally, more attention must be paid to making sustainability in the suitability assessment more understandable. This can lead to increasing interest – and increasing action – among investors in sustainable investments.

2.1 Market Overview
Figure 1. Services provided by the 114 investment firms4
? 114 Investment firms filled in the questionnaire.
They offer different services:
0 20 40 60 80 100%
Execution only
Advice
Asset management
39%
25%
85%
% respondents offering this service
Figures for H2.1: Market Overview
Fig 1 Figure title: Services provided by investment firms

Help the investor in search of sustainable investments Sustainability Preferences In the self-assessment, investment firms estimated what percentage of their customer base provides sustainability preferences in the context of the suitability assessment.

Figure 2. Sustainability preferences among customers Fig 2 Figure title: Sustainability preferences among customers
?
How many customers have sustainability preferences, according to investment firms:

20% of customers
1-10% of customers
10-20% of customers
0% of customers have sustainability preferences Almost half state that 1-10% of their customers have sustainability preferences.
18%
15%
18%
49%

Most investment firms state that only few customers have sustainability preferences. This is a significant difference from the AFM Consumer Monitor: here, half of investors state they do pay attention to sustainability. A possible cause is that the explanation regarding sustainability in the suitability assessment is currently so complicated that customers choose not to provide sustainability preferences.

Help the investor in search of sustainable investments 8 SUPERVISORY REPORT Investment firms themselves often give the following explanations: customers have no deep interest in the sustainability aspect, customers do not understand what is expected of them, the language use is too technical or does not align with the customer's experience.

Product Offering
The AFM asked investment firms providing asset management (asset managers) in its SFDR research about the sustainability of asset management portfolios. These asset managers collectively offer 233 asset management portfolios (products). Slightly more than half of these products report on sustainability.

Figure 3. Product distribution of asset managers
Fig 3 Figure title: Product distribution of asset managers Not sustainable Promotes sustainable characteristics Sustainable investments as objective 4% % Products 47% 49%

2.2 To what extent do investment firms incorporate sustainability into their product distribution?
The self-assessment on incorporating sustainability into product distribution was filled in by 114 investment firms. The self-assessment shows that most investment firms have POG policy for incorporating sustainability objectives. The way investment firms give substance to this varies. More than two-thirds of firms have (partially) evaluated their product offering on the integration of sustainability. More than half of investment firms have policy to incorporate sustainability into the negative target group of products without sustainability characteristics.

2.2.1 More than half has policy for determining sustainability objectives of the target group
Investment firms are required to include in their policy how they incorporate the sustainability objectives of the target group into product distribution. The sustainable characteristics of the product must align with the sustainability objectives of the target group. The updated MiFID II POG Guidelines can be used here. These Guidelines explain in more detail in which ways the sustainability objectives of the target group can be determined.

More than half (59%) of investment firms have policy for determining the sustainability objectives of the target group. For determining the sustainability objectives of the target group, attention is primarily paid to objectives in the area of Environmental, Social and/or Governance (ESG). The EU Taxonomy is used the least to determine sustainability objectives. Other methods mentioned include the use of Principal Adverse Indicators (PAIs).

It is important that the sustainability objectives of the target group are described sufficiently detailed (granular) (see practical example below). A target group description such as 'investors with a sustainability profile' is, for example, not very concrete and therefore contributes only to a limited extent to target group delineation.5

Help the investor in search of sustainable investments 9 SUPERVISORY REPORT Practical example:
A distributor shows the target group of an investment fund in the execution-only environment. The fund invests in companies active in resource extraction. The developer has not classified the investment fund as a product with sustainability characteristics, and does not provide information as intended in Article 8 or 9 SFDR. The distributor has formulated the target group of the investment fund in terms of sustainability as 'I do not want to invest fully sustainably'. This formulation is unclear and not very concrete. The formulation can give the impression that the investment fund invests partially sustainably. As a result, the product may end up with customers who exclusively want to invest in products with sustainability characteristics.

Sustainable investment products can be suitable for both investors who want to invest sustainably and for investors who do not have this wish. Conversely, investment products without sustainable characteristics do not fit a target group that finds it important to invest sustainably. These products must therefore not be sold to investors with sustainability objectives.

Less than half (43%) of investment firms have policy for determining the negative target group for products without sustainable characteristics. Sale of products to the negative target group must not take place. The AFM expects the other investment firms to ensure their POG policy provides for this. This ensures that customers do not receive products that do not align with their sustainability objectives.

Describe in the policy how sustainability objectives must be taken into account in the target group. Ensure that the sustainability objectives of the target group are described sufficiently detailed. Also describe in the policy how the negative target group for products without sustainable characteristics must be determined.

2.2.2 Majority has recorded in policy how investors in the execution-only channel receive products that match their sustainability objectives
The distribution strategy of a firm must ensure that products reach the determined target group and that (structurally) no sales are made outside the target group. This way, investors receive products that match their objectives. In management and advice, the suitability assessment is the primary means to ensure this. In execution only (EO), the distributor does not have the possibility to inquire about sustainability preferences. This makes it extra important that the information provision and the setup of the online choice environment are understandable and in order.

In the EO channel, almost three-quarters (73%) of investment firms have recorded in their policy how the distribution strategy must ensure that investors receive products that match their sustainability objectives. This usually happens by displaying product information, and to a lesser extent by using search filters or displaying the (negative) target group determination. Some investment firms also use the knowledge and experience assessment for this.

The AFM encourages the use of such methods and notes that it is important to evaluate their effectiveness. Some parties distributing products via the EO channel state they have a written distribution strategy to ensure investors receive products that match their sustainability objectives, but state they do not apply methods in their distribution strategy. The AFM calls on these parties to look critically at the effectiveness of their distribution strategy.

Apply methods in the distribution strategy that ensure customers receive products that match their sustainability objectives. And test this for effectiveness.

Help the investor in search of sustainable investments 10 SUPERVISORY REPORT
2.2.3 Three-quarters of parties receive sustainability information from product developer
Firms are largely dependent on the developer of the respective product for information about the sustainability characteristics of a product. Good information enables a firm to look at whether the product actually aligns with the sustainability objectives of the target group.

Three-quarters (74%) of firms state they sometimes or always receive information from the developer about the sustainable characteristics of the product and the sustainability objectives of the target group. The AFM calls on parties that do not or insufficiently receive information from the developer to take steps to obtain this anyway, or, if this is not possible, to use other sources, such as specialized data providers.

The