- Educational components to clearly explain different ESG investment options, sustainability-related risks, data usage, scoring methodology, etc
- Understand and efficiently record investor’s specific views and objectives in an interactive assessment flow
- Advisory tool visualizing and documenting alignment of suggested portfolio and investor’s preferences
- A simple process to replace instruments within the advice flow based on sustainability metrics. Document change in investors preferences or instrument adjustment efficiently.
- Gain insight into investor’s additional preferences to provide thematic and impact strategies in the future
- Wide flexibility to configure sustainability assessment questions and alignment presentation
- Sustainability data configuration and logic mechanism for aggregated data to match investors' preference scale
- Sustainability Assessment with Deep Alpha quick-start provides a pre-designed regulatory assessment questionnaire and alignment analyses together with required documentation for compliance
There are three types of assessment components
- Assessment question with a dependency logic. This question with bindary answer alternatives will decide whether further assessment will be presented to the investor or not
- Sustainability question type alignment criteria measured on a granulation bar (Scale 1 to 7)
- Sustainability question type preference criteria measured by up to 20 preference card (Binary selection yes/no)
Generic assessment question for the investor is a dependency questions with a logic defining whether further questions about sustainability will be presented to the investor or not. It is possible to define two answer alternatives whereas 1st alternative will end the questionnaire (negative alternative) and the 2nd alternative (positive alternative) enables the rest of the questionnaire and provides detailed assessment of investors sustainability preferences. Dependency question allows the investment firm to map the overall preference of the investor regarding sustainability. Configuration of dependency question is required question in the session if it is enabled in the sustainability module. Advisor notes can be added to the question and set to required if needed.
Sustainability assessment component called alignment criteria is enabling configuration of questions that are measured on the granulation bar. Alignment criteria allows recording investors preferences and comparison of those preference with scores that are provided for each instrument in the investment universe based on the configurable scale in Deep Alpha.
- Possible to configure up to 5 different alignment criteria measured on the granulation bar
- Configuration consists of the headline of the question, question to the investor, advisor note, mandatory field settings for the question and advisor note
- Possible to configure advisor notes for each question based on needs, and define whether the advisor notes are by default required or not
- Possible to configure order of alignment criteria on the sustainability page
- Possible to configure order of components - alignment criteria vs preference cards
- Define the label (name) for each step on the granulation bar
- Minimum number of steps on the granulation is 3
- Maximum number of steps on the granulation bar is 7 steps.
- Granulation bar setup and scoring logic applies for every alignment question
- Each step on the granulation bar requires configuration of scoring. This score is linked to investors answer and used on the Proposal page when investors answers and instruments score are compared. Configuration example of granulation bar: Step 1: Score 0, Lable: Undecided Step 2: Score 1, Lable: Not important Step 3: Score 2, Lable: Important Step 4: Score 3, Lable: Very important
Preference criteria component in the sustainability assessment allows advisors record investors preferences by asking a question about 1 - 20 criteria that investor can answer "yes" or "no" to. Preference criteria component is widely used to map investors ethical choices or product exclusion preferences. Preference criteria data configuration in the universe file uses true or false values given to every instrument. Those valus are set based on the raw data and the tenant will do threshold per each criteria. Key points
- Possible to configure 1-20 criteria
- Possibility to set custom icons to preference cards (svg file), use Deep Alpha default icons or disabled icons
- Preference criteria that investor selected, will be presented in the Proposal page alignment overview
It is important to acknowledge that the sustainability data utilized to evaluate preference criteria (i.e., exclusions, inclusions, PAI) must be provided in binary format (yes/no), as investors' responses will be captured on a binary basis. Should the sustainability data from Morningstar (or other data sources) not be in a binary format, the tenant has to establish a threshold for each criterion, enabling Deep Alpha to convert the data into a suitable binary format. Tenant who have chosen to utilize "product involvement % in portfolio" datapoint from Morningstar, often set this threshold to 1% or 5% depending their own guidelines. The threshold determined by the tenant should be clearly communicated within the educational modal to uphold transparency in data usage.
Sustainability assessment of investors preferences and instruments sustainability scores are presented on the Proposal page.
Investors preferences and funds scores can be presented as:
- Standard Alignment table - scores for each assessment component is presented and compared with investor's preferences
- Weighted Alignment table - weighted sustainability score for each fund where each alignment component has given the weight
The content of educational modals, text and visual elements, are configurable. Deep Alpha Advisory Platform provides the set of pre-designed educational modals covering regulatory terms such as sustainable investment according to Taxonomy and SFDR, visualize and clarify how investor's preferences are being used and what data provider(s) are being used to classify the funds.
An educational modal can be enabled for each alignment criteria. One educational modal can include up to 5 pages.
Suggested portfolio sustainability score is presented on the Proposal page under Sustainability section. Sustainability API calculates portfolio score per alignment criteria. It takes the sustainability score per instruments for given alignment criteria, considers instruments proportion in the portfolio and aggregates portfolio weighted average score. In case of lack of sustainability data for a certain instrument, the calculation excludes this instrument from the calculation of weighted portfolio sustainability score. Example Fund A: allocation 33,3% score: 3 Fund B: allocation 33,3% score: no data = instrument is excluded * Fund C: allocation 33,3% score: 1 Portfolio's sustainability score is: 2.00 Database is missing taxonomy alignment score for fund B. Calculation (3+1) / 2 = 2 Calculation if all data fields were filled out (3+x+1) / 3.
How does investor's preferences for sustainable investment affect the advice given?
Sustainability preferences do not directly affect the proposed model portfolio due to principle of MiFID II, that states the sustainability assessment should not oversteer suitability assessment e.g. risk, cost, return). It is possible to configure a platform that include instruments that are meant for investors with high expectations to their portfolio sustainability performance. Instruments in the suggested or chosen portfolio are compared with the customer's response to sustainability alignment (in the Proposal section). If there is a discrepancy between the advice and the customer's preference, it is possible to replace the instruments within an asset class (custom portfolio functionality). Such process is a dialog between the advisor and investor, any changes must be documented in the flow.
In case the investor chooses to adapt their preference(s) for sustainable investments how and where can this decision be documented?
Reference to MiFID II (EU): "Where no financial instrument meets the sustainability preferences of the client or potential client, and the client decides to adapt his or her sustainability preferences, the investment firm shall keep records of the decision of the client, including the reasons for that decision."
There are three scenarios: 1) Investor changes their initial preferences, there is no change to suggested portfolio 2) Investor do not change their initial preference, advisor adjusts the suggested portfolio by removing some instruments and replacing them with instruments that meet investors preferences 3) Investor changes their initial preference after reconsideration, proposed portfolio remains the same, advisor documents the dialog and reasoning for investors new preferences.
- Investor adapts
Sustainability alignment (scores and status)is shown under the Sustainability analytics on Proposal page. In that stage, it is natural to discuss the portfolio's sustainability alignment and investor's preferences.
If investor chooses to change their initial preference, the advisor will return to Sustainability assessment page, change the preference and fill in the additional information field to provide the background for this decision. Documented decision will appear in the final report.
2. Advisor adjusts proposal and creates a custom advice
If the result of the discussion around portfolio's sustainability alignment and investor's preferences lead to adjustments in portfolio, the advisor will return to Advice page and adjust the portfolio in custom portfolio mode. If it is possible, the advisor will replace the instruments (or edit instruments' allocation) to meet investor's preferences. The advisor will then fill in the advisor notes to provide the background for the decision for changing the instruments based on investors sustainability preferences. Documented decision will appear in the final report.