ESMA expects to publish final report on revisions to MiFID II sustainability guidelines

Background

In June 2020, the European Commission published drafts of its proposed changes to Mifid II to incorporate environmental, social and governance considerations into its suitability rules.

There is a current requirement for financial advisers and portfolio managers to carry out thorough suitability assessments of their clients before recommending any financial instruments or products.

Under the proposed changes, ESG or sustainability preferences will be included in these assessments.

ESMA Intention

By way of background, there is clearly an underlying agenda from the European Commission to place private capital into green investments.

ESMA is looking at the suitability guidelines for when the new requirements drop into place in August.

The three determining factors for sustainability preferences:

  1. A financial instrument in which the client determines a minimum proportion is invested in environmentally sustainable investments as defined by the EU taxonomy.
  2. A financial instrument in which the client determines that a minimum proportion is invested in sustainable investments as defined by the Sustainable Finance Disclosure Regulation.
  3. A financial instrument that considers principal adverse impacts on sustainability factors.

The problems

The wording is too complex and is further complicated by the fluidity in the taxonomy framework which has thrown up confusion as to recent classifications.

Jargon heavy drafting brings confusion to explain in context to client sustainability preferences.

Firms currently not offering full range of ESG products.

Data Issues

Managers are required to have data on the full spectrum of their investment products to be provided to their clients for the purpose of matching to their clients’ sustainability preferences; however, the ESG data on products is often notoriously difficult to gather and is compounded by the pure volume.

There is however recognition that Data firms are working hard with the industry to resolve these issues.

Conclusion

This is of course a highly desired route for the industry adopt as it comes alongside such hot topics and issues such as climate change.

Regulators are cognisant of the fact that at the moment there are numerous issues but it is seen as important that firms make a reasonable attempt at compliance now for what will be a rapidly evolving subject.

Read our other latest items from the Regulatory Calendar at:

MiFID Final Policy on the trading venue perimeter – Anticipated Q3 2002 >>

Diversity and inclusion on company boards and executive committees >>

New Anticipated Rules: FCA Consumer Duty >>

Should you have any questions on the above or wider compliance issues please contact Xcina Consulting.

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