Modern economics places great emphasis on the concept of sustainability preferences. They describe a customer’s or organisation’s preferences for goods, services and financial commitments that reduce their negative impact on the environment, social conditions and economic efficiency.

Chapter overview

Why is this topic important for companies?

Due to economic, environmental, social or political factors, these choices can change. As companies strive to reduce their negative impact on the environment while improving the social situation, preferences for sustainability have become more important.

Many companies are eager to offer environmentally friendly products to consumers at a better price and quality. Investors’ decisions can also be significantly influenced by sustainability preferences.

By investing in companies that are committed to meeting their social and environmental obligations, investors can focus on sustainable investments. This can help investors build a portfolio that offers the right combination of return and risk.

In general, sustainability preferences offer several benefits for companies, investors and clients. They help companies reduce their environmental impact while improving social conditions.

Investors can build their portfolios in a sustainable way, while consumers benefit from better product quality and pricing.

Sustainability preferences – Simply explained

The conscious choice of behaviours, goods or services that promote social, economic and environmental sustainability of development is called a sustainability preference.

Sustainability is the concept that our choices today will have an impact on how our society, economy and environment will develop over time. Therefore, adopting sustainability preferences is a method to create a more sustainable future.

Using goods and services that are energy efficient and use fewer natural resources, buying goods made from sustainably sourced materials, supporting morally and socially responsible businesses, investing in sustainable businesses and sustainable technologies, and using zero-carbon transport are some common sustainability preferences.

Businesses, people and organisations can increase their profitability while reducing their negative impact on the environment, society and the economy by implementing sustainability preferences.

Businesses can improve their reputation and gain a competitive advantage by adopting sustainable practices. Sustainability preferences can take many different forms.

For example, companies may employ more people from underserved areas, use sustainable materials in their products, or strive to use less energy. People may choose sustainable products, recycle more, use less energy and use alternative means of transport.

A more sustainable future can be achieved by choosing sustainability. Businesses can help secure a better future for the environment, society and the economy by making more sustainable choices.

Changes since 2 August 2022 – BaFin informs

Since 2 August 2022, financial portfolio management and investment advice must also take the aspect of sustainability into account. The Federal Financial Supervisory Authority (BaFin) published an official information letter on this, which you can read here.

The notification states that securities service providers must take into account any sustainability preferences of their clients when providing investment advice and managing financial portfolios.

This is the result of the amendment of the Financial Markets Directive MiFID II by the Delegated Regulation 2017/565 n.F. by the European legislator, which is directly applicable in Germany. The amendment aims to include sustainability aspects in financial advice and to direct money and capital into environmentally friendly investments.

In practice, this means that investment advisors must inquire about the sustainability preferences of their clients and may only suggest financial products that correspond to these preferences. Accordingly, sustainability preferences are added to the previous investment objectives of “investment purpose”, “investment duration” and “risk tolerance”, which an investment service provider also had to take into account in the suitability test.

Furthermore, the BaFin publication states: If a client cannot initially obtain a product that corresponds to his or her sustainability preferences, he or she will be given the opportunity to change them during the advisory process. The investment services company may not advocate for a change if the client does not want this.

BaFin will closely monitor the application of the new rules. If necessary, it will ask the providers of investment services to make changes. The annual examination under the Securities Trading Act will also check compliance with the extended rules on suitability.

Accordingly, the examiners are encouraged to use the already published drafts of the regulatory technical standards and ESMA guidelines mentioned in the notification as a reference for open (interpretation) questions, similar to what investment services firms do. (Source: BaFin, https://www.bafin.de/dok/18344288, 03.08.2022)

ESG criteria – definition and relevance

Environmental, social and governance criteria are referred to as ESG criteria. ESG criteria stand for environmental, social and corporate governance considerations that must be taken into account when determining the value of a company or an investment.

The importance of ESG criteria is rooted in the recognition that environmental, social and corporate governance issues are critical components of an effective long-term business plan.

By considering these issues, investors can more accurately determine how much risk they are taking on when investing in a company. This is critical because companies that ignore sustainable practices run a greater risk of suffering a loss on their investments.

In addition, companies that meet ESG standards often generate more enticing returns than those that do not. Thus, companies that adopt sustainable practices can attract the attention of investors looking for sustainable investment opportunities.

It is expected that companies that meet the criterion will compete more successfully for investment and credit than those that do not, due to the growing importance of ESG criteria.

This indicates that the consideration of ESG factors is becoming increasingly important for companies and investors.

Sustainability preferences for investors – function and application

For many investors, sustainability preferences play an important role in their investment decisions. They can use them to align their financial decisions with moral or environmental standards.

In this way, they can ensure that their investments are made in companies and sectors that are committed to protecting the environment, respecting human rights and treating employees fairly.

A form of investment strategy known as sustainability preference allows investors to put their money into companies and sectors that are committed to achieving sustainability goals.

This investment approach can help to financially reward companies and sectors that make a positive contribution to sustainability. Investors can also ensure that their money does not go to companies or sectors that violate human or environmental rights.

There are various strategies for making sustainability decisions. For example, investors can make lists of companies they should favour and stay away from.

They can also focus their investments on certain areas or sectors that have committed to achieving certain sustainability goals. Some investors may even support certain companies or sectors that they have specifically selected based on sustainability standards.

By choosing to invest only in companies and industries that have committed to achieving sustainability goals, sustainability preferences can help investors and investors invest ethically and responsibly.

By putting these preferences into practice, investors can be sure that their money is going to companies and industries that contribute to sustainability.

Queries and corporate standards – sustainability preferences and MIFID II

In order to protect the financial sector and investment opportunities for clients and investors, the European Union has adopted a variety of directives and laws. MIFID II (Markets in Financial Instruments Directive II), one of these directives, came into force in January 2018.

Financial service providers must help investors choose the right financial products and give them the tools they need to pursue their financial goals and preferences in accordance with MIFID II.

Financial service providers are required to disclose the company’s sustainability preferences to investors in accordance with this Directive. Financial service providers must ask investors numerous questions to ensure that they are aware of their sustainability preferences.

The questions can be asked in the form of a written statement by investors outlining their sustainability preferences or they can be asked directly by financial service providers in a face-to-face meeting.

Financial service providers must also create a sustainability assessment process for investment decisions that takes into account sustainability standards and practices.

This process should ensure that the investment product meets the investor’s preferences, while helping the investor to understand the risks and benefits of the investment product.

By ensuring that their investment decisions are in line with the investor’s wishes, financial service providers and investors are encouraged to make sustainable investments under MIFID II.

In order to meet companies’ obligations to their investors, the introduction of this Directive will also ensure that investors are informed about companies’ sustainability choices.

Changing sustainability preferences – developments and trends

Sustainability is a major issue in business today and is of critical importance to both companies and their customers. Consumer preferences for environmentally friendly goods and services are constantly changing.

According to a survey by the Research Institute for Sustainability and Innovation (FNI), consumer preferences for sustainability have changed drastically in recent years. According to the report, customers’ interest in environmentally friendly products has increased by more than 50% since the survey began.

Similarly, more than 30% more people have become interested in socially responsible products in the last year. The survey also found that consumer attention has recently shifted away from the bottom line to the sustainability of production methods.

While consumer tastes in sustainability have changed recently, it is important to keep in mind that this shift will continue. According to the FNI study, consumers are increasingly willing to spend more money on sustainable products.

Furthermore, shoppers will be increasingly interested in buying goods that have been produced in an ethical way. Therefore, in order to satisfy their customers, companies need to ensure that they produce their goods and services in a sustainable way.

This means that they must ensure that economic, environmental and social factors are taken into account in the production of their goods. Consumers can also contribute by choosing sustainable goods over conventional ones.

In this way, companies and customers can work together to shape a sustainable future.

Recommendations and expectations: Sustainability preferences in investment strategies

Sustainability preferences play an important role in the development of investment strategies. Investments can lead to better results in the long term if social, environmental and financial factors are taken into account.

Before deciding on an investment strategy, investors should consider their preferences for sustainability. Talking to a financial advisor who knows about sustainable investments is one of the best ways to determine one’s sustainability preferences.

A financial advisor can help gain knowledge about the many investment techniques that are best suited for a particular goal. A financial advisor can also help to clearly identify the dangers associated with a particular investment strategy.

When developing an investment strategy, it is important that investors think long-term. They should set clear investment goals and build a portfolio that will help them achieve those goals. Investors should also have a strategy in place in case market conditions change so that they can adjust their portfolio.

A financial advisor can assist in creating such a plan. In addition, investors need to ensure that their investment plan is consistent with sustainable choices.

Using sustainable financial products in the portfolio and assessing the many financial, social and environmental impacts of the investments are among the things investors need to be aware of.

To ensure that the investment assets they choose are in line with sustainable preferences, investors need to ensure that they have gone through screening. Investors should ensure that they understand the impacts of their investments and choose an investment strategy that matches their preferences.

Investors should also ensure that they have a financial advisor who is knowledgeable about sustainable investments. Only then will investors achieve higher returns in the long run.

Sustainability preferences and the law – the role of lawyers

A key component in promoting sustainability preferences is the legal profession. In order to improve people’s quality of life, sustainability refers to protecting the environment and upholding moral principles.

  1. By helping companies develop and implement sustainability strategies, lawyers can promote environmentally friendly activities. They can also help companies fulfil their obligations and ensure that they comply with legal and regulatory requirements.
  2. In addition, lawyers can play a crucial role in the creation and application of rules and laws that support sustainability. They can help draft agreements and other documents that impose strict sustainability requirements on companies.
  3. They can also help draft laws and policies that support sustainability. Lawyers can support companies that violate sustainability regulations by defending them.
  4. They can help companies defend themselves against allegations that they have breached sustainability regulations. They can also help enforce sustainability standards by ensuring that they are met.
  5. Lawyers can actively help companies achieve and maintain sustainability. They can help companies create plans that promote sustainability across the board.
  6. By examining the economic impact of sustainability, they can also help reduce the cost of sustainability. Finally, lawyers can support the development of a sustainable culture. They can contribute to the development of a society where sustainability is the norm.
  7. They can encourage companies to make ethical and law-abiding decisions, while ensuring that these decisions are made in a sustainable way.

All the facts at a glance

1. How do you prefer sustainability?
The concept of sustainability preference explores how sustainability factors influence decisions when choosing goods and services. It explains how companies and customers prioritise ethical, environmental and socially responsible factors in their purchases.

2. Why is the sustainability choice important?
Sustainability preference matters because it affects how businesses and consumers choose products and services. Consumers and businesses can reduce the negative impact on the environment and society by choosing sustainable options.

3. What factors influence preferences for sustainability?
A variety of factors, such as individual beliefs, economic interests, social pressures and cultural attitudes, affect preferences for sustainability.

4. What types of goods and services are most environmentally friendly?
Given the variety of factors that influence the sustainability of different goods and services, it is difficult to give a general answer to this question. However, in general, the most sustainable goods and services are those that are made from recyclable materials.

5. How can consumers tell which goods and services are sustainable?
Information about the materials or manufacturing methods on labels and packaging can help consumers choose sustainable goods and services. Customers can also research online to find out more about the sustainability of different goods and services.

6. How can companies improve their preferences for sustainability?
Companies can increase their preference for sustainability by checking their supply chains to ensure that they offer sustainable goods and services. Companies can also ensure that sustainable products and services are prioritised and monitor compliance.

7. What are the benefits of considering sustainability preferences?
Taking sustainability preferences into account can help companies reduce costs and increase sales. By promoting greener solutions, it can also help reduce the negative impact of goods and services on the environment.

Want more information?

A sustainable, responsible economy and society depends on people’s preferences for sustainability. They serve as role models for how individuals can contribute to improving the environment and social well-being.

Consumers and businesses can ensure that sustainable practices are promoted and protected by giving preference to sustainable goods and services.

To improve and optimise their products and services, companies can also identify and take into account the sustainability preferences of their customers.

Promoting sustainable practices is an essential part of social progress and economic development in the modern world. Companies can improve their business and social environment while protecting the environment by recognising and supporting sustainability choices.

Visit our contact page and get in touch if you would like to learn more about sustainable options. Our lawyers will be happy to help you.