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It concerns environmental, social and governance criteria, product alignment with the European taxonomy and negative investment externalities. What do sustainability preferences mean for product governance and the product manufacturers target market concepts? Firms inability to meet end investors sustainable needs: due to the required assessment granularity and the requirement to ask clients for minimum percentages of sustainable investments, firms may not be in a position to match products to clients preferences. 2020 EYGM Limited. Regulators will nonetheless be vigilant when it comes to interpreting the legislation: The European Securities and Markets Authority (ESMA) has recently clarified this point by providing the first elements of a prescriptive framework. Technology will also have a prominent role in the offering for clients under MiFID II: Algorithms will make it possible to translate the constraints from the questionnaires into optimal portfolios meeting investor needs. Be in line with the European taxonomy goals such as climate change mitigation and ecosystem protection. After the introduction of MiFID II, level 2 regulatory technical standards will apply from 1 January 2023. Cybersecurity, strategy, risk, compliance and resilience, Value creation, preservation and recovery, Climate change and sustainability services, Strategy, transaction and transformation consulting, How a collaborative approach helps CGT treatments reach more patients, How blockchain is reducing the fluidity of risk in marine insurance, How the right conversations can empower finance transformation strategies. sustainability scorecard slide designing ahrq surgery presentation Depending on the objectives, funds will either have to limit the principal adverse impacts (PAI), such as greenhouse gas emissions or gender wage inequality, or integrate a proportion of assets defined as "sustainable" or in line with the European taxonomy, such as climate change mitigation or ecosystem protection. 0000018125 00000 n The main changes included by the Delegated Regulation and addressed by the Guidelines are: The collection of information from clients on sustainability preferences: identify the clients preferences in relation to the different types of sustainable investment products and to what extent they want to invest in them, The assessment of sustainability preferences: identify the products that meet the clients sustainability preferences, The organizational requirements: provide staff with appropriate training on sustainability topics and keep updated records of the sustainability preferences of the client. 0000026475 00000 n

Like any major upheaval, the transition will take place over time and with the help of all stakeholders distributors, asset managers, regulators, and, of course, investors themselves. Furthermore, the Corporate Sustainability Reporting Directive (CSRD), still under negotiation, will strengthen companies' financial and ESG reporting obligations from 2024. Will your NFT investments soon be subject to VAT? This document does not constitute investment advice. For an explanation of how we use cookies on our website, please refer to our. Portfolio Monitoring & Claims Verification, ISS ISO-Information Security Whitepaper (June 2021), Governance Analytics (Corporate Issuer Data Verification), Privacy (including cookies), Social Media & Legal. endobj On 27 January 2022, ESMA opened a consultation on the draft guidelines which address the inclusion of sustainability preferences in a clients suitability assessment from a practical perspective. Click on the different category headings to find out more and change our default settings. The asset management industry has a critical role to play in this new paradigm of ensuring a complete offer corresponding to the entire range of investor profiles, not only in terms of ESG preferences, but also in risk taking, portfolio diversification and liquidity. In order to assess investor preferences for sustainability, distributors of financial products must draw up a questionnaire to determine investors' expectations around environmental, social and governance criteria, alignment with the European taxonomy and negative investment externalities, such as those damaging to health. In terms of expressing a client's sustainability preferences, the MiFID ESG Regulation outlines three categories of sustainability for investment products that it considers should be integral to a client's sustainability preferences, as summarised below: Investors will be asked if they want their investment to have one or more of these features and if so, how much of each. We bring together extraordinary people, like you, to build a better working world. Chicago, IL 60601, New challenges for the asset management industry, The challenge of data, the first essential step, Commentary: Long/short equities an unconventional inflation hedge, Commentary: TSP's new mutual fund window including ESG options is long overdue, The Institutional Investors Guide to ESG Investing, Climate Change: The Inescapable Opportunity, 2022 Defined Contribution East Conference, Deutsche Bank, DWS raided over allegations of greenwashing, U.K. proposes rollback of MiFID II research rules for bonds, small companies, Asset managers including more assets in net-zero targets report, Vanguard: On course to net-zero investment portfolio goal, SEC wants more disclosure on funds using ESG factors, HSBC's suspended banker taken to task by key architect of ESG. It is essential that their completion leads to an inspiring exchange of information between client and adviser, rather than being an administrative formality.

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Investor responses will have to be translated into a concrete product offering. 130 E. Randolph St. Europe (Germany): +49.89.462.248.100. Where such mismatches between high client expectations and product offering need to be addressed, iterative assessments may become burdensome for clients and may also increase costs for the firm. Distributors will then have to make investment recommendations based on these preferences relating to sustainability. On 27 January 2022, the European Securities and MarketsAuthorities (ESMA) published a consultation paper on theGuidelines on Certain Aspects of MiFID II Suitability Requirementsin order to add the sustainability risks and preferencerequirements included by the last MiFID II Delegated Regulatiation1(the Guidelines). Please check the boxes below to subscribe, Investment strategies and asset allocation, Our latest regular features, outlooks and reports, Article "{postName}" added to your bookmarks, Article "{postName}" removed from your bookmarks, Limit negative impacts such as greenhouse gas emissions or gender wage inequality, Integrate a proportion of assets defined as sustainable.

0000021144 00000 n Joel Yarm,Managing Director,Head of EMEA ESG Sales,ISS ESG, Americas: +1.646.680.6350 The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. Please let us know if you accept our use of cookies.

Investments that consider sustainability factors - Financial instruments that consider principal adverse impacts ("PAIs") on sustainability factors, where elements demonstrating that consideration are determined by the client or potential client. One specific aspect of the Delegated Acts is: (i) Commission Delegated Regulation (EU) 2021/1253 (the "MIFID ESG Regulation"); and (ii) Commission Delegated Directive (EU) 2021/1269 ("MIFID ESG Directive") to integrate sustainability considerations into the suitability assessment and product governance obligations under MIFID II. MIFID II currently provides that when an investment firm offers investment advice or portfolio management services to a client, it is first required to obtain information on (among other things): (i) the client's investment objectives (i.e. Putting the client at the centre of the process by allowing them to express their investment choices will lead to greater portfolio customisation, but also allow for a more harmonised Environmental, Social & Governance (ESG) product offering.

Thomas Harding,Associate V.P.,Regulatory Solutions Lead,ISS ESG 0000014762 00000 n This could also be an important factor for Level 2 of SFDR (in force from 1 January 2023) and play a part in how firms develop detailed disclosures for ESG-focused funds' prospectuses, websites and periodic reports. xref trailer investment strategy is defined and ask the client to adapt his/her preferences.

endobj All Rights Reserved. Some emerging markets offer less security than the majority of international developed markets. We advocate the use of digital paths, for a streamlined, simplified experience connected to the portfolio construction algorithms. 0000004678 00000 n In line with the stated objectives, funds will have to either: Currently, BNP Paribas Asset Managements offering includes a product range integrating ESG criteria with more than EUR 330 billion in assets under management (end December 2021) covering a broad set sectors and geographies. How do you move long-term value creation from ambition to action?

685 0 obj Further information on our Irish Financial Services Regulatory Group, and the services we provide is available on our website and in our brochure. <>/Metadata 15 0 R/Pages 14 0 R/StructTreeRoot 17 0 R/Type/Catalog/ViewerPreferences<>>> Subscribe to receive this weeks articles straight to your inbox. This could be a key consideration when assessing the merit of investment funds categorised as Article 8 financial products under SFDR that: (a) do not make a quantitative commitment to investment in sustainable investments and / or; (b) do not consider PAIs on sustainability factors. hbbbg`b``3 1x4>Fc8` $

Under the MiFID ESG Regulation, it will also be mandatory to obtain information and assess investment suitability on the basis of a third element, that is, the client's sustainability preferences. On 27 January 2022, the European Securities and MarketsAuthorities (ESMA) published a consultation paper on theGuidelines on Certain Aspects of MiFID II Suitability Requirementsin order to add the sustainability risks and preferencerequirements included by the last MiFID II Delegated Regulation1(the Guidelines). endstream Australia: +61.2.8048.3999 This means investment firms should already launch their project on the basis of Guidelines included in the consultation.

Guidelines on certain aspects of the MiFID II suitability, Commission Delegated Regulation (EU) 2021/1253 of 21, April 2021 amending Delegated Regulation (EU) 2017/565, as regards the integration of sustainability factors, risks and, preferences into certain organizational requirements and, operating conditions for investment firms, The clients knowledge and experience in the investment field relevant to the specific type of product or service, The persons financial situation including their ability to bear losses and, Their investment objectives including their risk tolerance so as to enable the investment firm to recommend to the client or potential client the investment services and financial instruments that are suitable for him/her and, in particular, that are in accordance with their risk tolerance and ability to bear losses, Detailed reporting requirements applicable to investment products, which will become applicable as from 1 January 2023, Reporting of taxonomy-alignment by companies in scope of the Non-Financial Reporting Directive, which will become applicable as from 1 January 2023 for non-financial undertakings and from 1 January 2024 for financial undertakings, Whether the client has any sustainability preferences, If so, to what extent the client has sustainability preferences with regard to (a) environmentally sustainable investments,(b) sustainable investments and (c) financial instruments that consider principal adverse impacts (PAIs), For aspects a) and b), what are the clients preferences in terms of minimum proportion, For aspect c), which PAIs should be considered including quantitative and qualitative criteria demonstrating that consideration, Whether the client has a focus on either environmental, social or governance criteria or a combination of them or whether the client does not have such a focus, Which part of the portfolio (if any) the client wants to be invested in products meeting the clients sustainability preferences. However they should remain agile toswiftly adapt their client information collection processes in a fast- moving and highly competitive environment. These will provide a strong framework as to how asset managers communicate on so-called Article 8 and 9 funds under the SFDR regulation. The revision of the European Unions MiFID II directive taking effect this August and requiring investment firms to assess clients sustainability preferences sets a regulatory priority that will impact asset management professionals in 2022 and beyond. Amid the ongoing development of a legislative framework for sustainable finance, the revision of Markets in Financial Instruments Directive, or MiFID II, will be one of the key regulatory changes that asset management professionals will pay attention to in 2022 and beyond. To add to the complexity, under the MIFID ESG Directive, firms that are in scope of MIFID II product manufacturer obligations will need to consider the sustainability related objectives of clients when identifying a target market for the financial product effectively coming at the issue from the opposite direction of the investor.

In the coming years, the implementation of sustainable finance legislation will be a major project for the asset management industry. : since ESMA will collect feedback until the end of April 2022, the final Guidelines should be published shortly before, or more probably after, the application date (2 August 2022) of the Delegated Regulation. This exposure provides us with a 360-degree perspective as to how fund industry leaders are approaching ESG and we are therefore very well-positioned to action customised mandates for services incorporating ESG for managers of all sizes and across the spectrum of strategies. What could potentially emerge is a split between 'Article 8 Lite' and 'Article 8+ categories of funds with only the latter (in addition to Article 9 funds) having the necessary level of 'sustainability-related materiality' in order to be able to meet one or more of the three criteria to be eligible for recommendation to clients that have expressed sustainability preferences to their distributors / sales advisers.

Select your location Close country language switcher, EY Luxembourg Consulting Partner, ESG Services Leader. Can Sustainable Labeling of Financial Products Prevent Greenwashing? remember settings),Performance cookiesto measure the website's performance and improve your experience,Advertising/Targeting cookies, which are set by third parties with whom we execute advertising campaigns and allow us to provide you with advertisements relevant to you,Social media cookies, which allow you to share the content on this website on social media like Facebook and Twitter. For more information about our organization, please visit ey.com. Our team of highly experienced global lawyers work with leading investment managers and institutional investors in Europe, America and Asia to implement ESG policies and frameworks into their operational infrastructure. Passionate about achieving goals in teams. These cookies do not store any personally identifiable information.

We see this as a welcome initiative that should lead to harmonised questionnaires. These Guidelines involve some challenges that investment firms are currently facing notably with regards to, inter alia: Short implementation timeline: since ESMA will collect feedback until the end of April 2022, the final Guidelines should be published shortly before, or more probably after, the application date (2 August 2022) of the Delegated Regulation. To consistently deliver news, research and analysis to the executives who manage the flow of funds in the institutional investment market. This will not simply be a case of asking an investor whether they would like to invest in product is categorised as Article 6, Article 8 or Article 9 under SFDR. They may also be used to personalize your experience on our website by remembering your preferences and settings. Asset managers must ensure that the funds proposed align with the expectations defined by clients and distributors. Fifteen-plus years of experience in the financial services industry. The Directive 2014/65/EU on Markets in Financial Instruments (MiFID II) determines that investment firms should obtain the necessary information regarding: In August 2021, the European Commission published a delegated regulation2 (the Delegated Regulation) providing that investment firms should also identify the clients sustainability preferences. Speakers: Individual portfolio management teams may hold different views and may take different investment decisions for different clients. Like any major upheaval, the transition will take place over time and require the help of all stakeholders: Distributors, asset managers, regulators and of course investors. 714 0 obj The decision of the client should be documented. endobj Marina Reason,Partner,Herbert Smith Freehills LLP Please note that articles may contain technical language.

The answers given by clients will have to be translated into a specific offer, although this la carte model presents a major challenge, with the aim being to align clients' selection criteria with the characteristics of the funds offered. Front office staff should also have the necessary knowledge and competence with regards to the criteria of the sustainability preferences and should be able to explain them to clients in non- technical terms. Europe (UK): +44.20.3192.5799 0000012316 00000 n In total, there are five Commission Delegated Regulations and two Commission Delegated Directives (collectively the "Delegated Acts").

financial objectives); and (ii) the client's risk tolerances, in order to be able to recommend suitable investments. These will provide a strong framework for asset management companies' communication around Article 8 and 9 funds as defined by last year's Sustainable Finance Disclosure Regulation (SFDR).

Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice.

It is a powerful accelerator that gives investors power and improves supply transparency in a particularly dense regulatory environment where the fight against greenwashing is ubiquitous. This update examines the changes under the MIFID ESG Regulation on suitability assessment obligations and considers how this may impact the distribution of ESG-focused investment funds in the EU.

A Hands-On Session on the Implementation of Sustainability Preferences Under MiFID II and IDD, Marketing and Communications Email Optin.

"financial instruments that promote environmental or social characteristics without a proportion of sustainable investments or without a proportion of investments in taxonomy-compliant activities or where they do not consider principal adverse impacts will not be eligible for recommendation to the clients or potential clients based on their individual sustainability preferences." If the firm cannot meet those preferences, it should discuss this with the client when agreeing on the mandate in which theinvestment strategy is defined and ask the client to adapt his/her preferences. The answers to these questions will lead to an advanced level of portfolio customization, as well as allowing the harmonization of the ESG offering. It is worth noting that these obligations apply both to retail and to professional clients and that non-EU firms may also be in scope when servicing EU clients or distributing products in the EU. While we welcome the progress resulting from this regulatory framework, the order of the regulations could have been better: If first companies disclose their ESG data in a transparent and harmonised way, asset managers can use them in the construction of their fund offerings, and finally distributors can assess investor preferences for sustainable investments.

How do I record sustainability preferences in the suitability report?

Past performance is no guarantee for future returns. New York, NY 10017-4036, Chicago Office Shantanu Naravane,Senior Associate,Herbert Smith Freehills LLP, Moderator: These cookies are necessary for the website to function and cannot be switched off in our systems.

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