MiFID ESG suitability requirements specified by ESMA

On 23 September 2022, the European Securities and Markets Authority (“ESMA”) published its final report on Guidelines on certain aspects of the MIFID II suitability requirements (“Guidelines”). The Guidelines are an update of the 2018 version and apply as of six months from the date of their publication on ESMA’s website in all EU official languages.

The relevant changes stem from Commission Delegated Regulation (EU) 2021/1253, amending Delegated Regulation (EU) 2017/565 on organisational requirements for investment firms (“MiFID II Delegated Regulation”). From 2 August 2022, the application date of the MiFID II Delegated Regulation, MiFID firms providing discretionary portfolio management services or investment advice now also have to meet the client’s sustainability preferences in addition to the other parameters of the suitability test, including the client’s financial situation, knowledge and experience.

Hence, covered entities must gather information from customers about their preferences and their level of knowledge about sustainable investments. This concerns new clients as well as existing clients, at the next update of their profile.

The assessment of suitability being one of the most important requirements for investor protection in the MIFID II framework, the objective of the Guidelines is to ensure the consistent and harmonised application of the suitability requirements on the topic of sustainability throughout the EEA. The main takeaway points are:

• Information to clients on sustainability preferences

In order to help clients understand the concept of “sustainability preferences”, investment firms should explain clearly, avoiding technical language, the terms and distinctions between the different elements of the definition of sustainability preferences outlined under points (a) to (c) of Article 2(7) of the MiFID Delegated Regulation and also between these products and products without such sustainability features. They should also explain terms, concepts used when referring to environmental, social, and governance aspects (point 17 of the Guidelines).

• Collection of information from clients on sustainability preferences

The information on the sustainability preferences of the client should include all aspects mentioned in the definition of “sustainability preferences” according to Article 2(7) of the MiFID II Delegated Regulation and should be sufficiently granular to allow for a matching of the client’s sustainability preferences with the sustainability related features of financial instruments (point 26 of the Guidelines).

• The suitability assessment

Sustainability preferences should only be addressed once the suitability has been assessed in accordance with the criteria of knowledge and experience, financial situation and other investment objectives. In a second step, once the range of suitable products has been identified following this assessment,  the product or, with regard to portfolio management or investment advice with a portfolio approach, an investment strategy that fulfils the client’s sustainability preferences, should be identified (point 81 of the Guidelines).

• Qualification of firm staff

Staff should have the necessary knowledge and competence with regard to the criteria of the sustainability preferences as specified in Article 2(7) of the MiFID II Delegated Regulation and be able to explain to clients the different aspects in non-technical terms. To that effect, firms should give staff appropriate training (point 106 of the Guidelines).