Stakeholders React to Proposed ESG Amendments to MIFID II

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    Stockholm (NordSIP) – In the latest step of the process of legislating a sustainable investment infrastructure for the European Union, the European Commission requested feedback on legislative proposals aimed at facilitating sustainability disclosures. Although the responses it received from stakeholders were supportive, there were some concerns about overreach and deadlines.

    Proposed Amendments

    The proposed amendments belong to the disclosures part of the EU Sustainable Finance Action Plan, which also includes the EU Sustainable Finance Disclosure Regulation (SFDR). The Action plan also provides for the creation of a Taxonomy of what constitutes green economic activities, proposals for the creation of an EU Green Bond Standard, as well as an amendment to the benchmark regulations

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    The draft EU legislation proposes six amendments to the Delegated Regulation (EU) 2017/565, which add obligations for investment firms to advise clients on social and environmental aspects of financial products to the pre-existing requires on disclosures, organisational requirements and operating conditions. The Delegated Regulation (EU) 2017/565 supplements Directive 2014/65/EU, also known as MiFID II, by further specifying organisational requirements and operating conditions for investment firms.

    The amendments begin by adding definitions of the meaning of the terms “sustainability preferences”, “sustainability factors” and “sustainability risks” to Article 2 of the 2017 delegated regulation. The next amendment adds a requirement for firms to take into account sustainability risks and what should be taken into account in this assessment to Article 21. The third amendment focuses on Article 23 of the 2017 delegated regulation and focuses on risk management. It specifies that when firms “establish, implement and maintain adequate risk management policies and procedures,” investment firms “shall take into account sustainability risks”. The amendments also add a requirement that investment firms consider “sustainability preferences” to the set of conflicts of interest considered under Article 33.

    The fifth proposal amends article 52 to require that investment firms disclose “the factors taken into consideration in the selection process used by the investment firm to recommend financial instruments, such as risks, costs and complexity of the financial instruments.” This amendment also adds a fourth paragraph to that article requiring investment firms providing advice to “distinguish for each type of financial instrument, the range of the financial instruments issued or provided by entities not having any links with the investment firm” in case its recommendations include financial instruments issued by the investment advisor itself or close associates.

    In assessing the suitability of investment recommendations as per Article 54 of the 2017 directive, investment firms are now required to obtain information about “any sustainability preferences” of new or existing clients not only its risk tolerance. “Sustainable factors” are also to be included into the set of “policies and procedures to ensure that they [investment firms] understand the nature, features, including costs, risks of investment services, and financial instruments selected for their clients”. Finally, investment advice must include an assessment of “how the recommendation provided is suitable for the retail client” given the client’s sustainability preferences, as well as all the other purely financial considerations already included in the previous directive.

    Stakeholder Feedback

    In its reply, Eurosif – a sustainable and responsible investment association representing 500 organisation across Europe – expressed its commitment and support for the EU’s sustainability agenda. In particular, it endorsed the goals of redirecting “capital towards sustainable investments, the management of financial risks stemming from ESG issues and fostering transparency and long-termism in the financial system and the overall economy”. The only corrections to the proposed amendments suggested by Eurosif focused on the subject of Principal Adverse Impact (PAI). It suggested that Recital (5) “be amended to reflect that a product having as objective sustainable investments or taking into account environmental and/or societal characteristics, as well as PAI, should be able to have the widest possible target market when it comes to meeting sustainability preferences.” It also urged “the Commission to monitor closely the feasibility of the PAI and if necessary, to make clear that Article 8 products not fully meeting the PAI test may nevertheless be deemed eligible to meet clients’ sustainability preferences.”

    The reaction from the European Fund and Asset Management Association (EFAMA)  was more subdued. Although it echoed the supportive spirit of Eurosif, most of the focus of the response was on the danger that the amendments create additional requirements for ESG strategy products, which it argues goes beyond the framework laid out by the SFDR. “It is therefore essential that the Commission makes changes to the current proposals to ensure that the final delegated acts are fully aligned with SFDR”, EFAMA’s feedback argues. “There should be a clear distinction between Article 8 and Article 9 products and only the latter should be required to invest in sustainable investments as defined by SFDR Article 2(17).”

    The European Banking Federation (EBF), expressed concerns about the implementation deadline and the consistency of the sustainable finance regulations, including e concepts related to sustainability. The Association for Financial Markets in Europe (AFME) also echoed the concerns of the EBF regarding deadlines and timetables. In its feedback, the AFME recommended that the regulation “should apply nine months after the deadline for the national laws reflecting the updated Delegated Directive on product governance to take effect.”

    Image by S. Hermann & F. Richter from Pixabay

    Filipe Albuquerque
    Filipe Albuquerque
    Filipe is an economist with 8 years of experience in macroeconomic and financial analysis for the Economist Intelligence Unit, the UN World Institute for Development Economic Research, the Stockholm School of Economics and the School of Oriental and African Studies. Filipe holds a MSc in European Political Economy from the LSE and a MSc in Economics from the University of London, where he currently is a PhD candidate.
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