The European Parliament and the Council of the European Union have implemented new ESG suitability requirements as part of the second Markets in Financial Instrument Directive (MiFID II).
The key market development will see the integration of new sustainability factors for investment firms that follow MiFID II compliance.
The assessment of suitability is one of the most important protections for investors under MiFID II, according to the European Securities and Markets Authority (ESMA).
The assessment applies to the provision of all types of investment advice (whether independent or not) as well as portfolio management.
The original Directive, which officially entered into force on 3 January 2018, is designed to strengthen investor protection and improve the functioning of financial markets.
In August 2021, the European Commission published a delegated regulation which outlined that investment firms should also identify the client’s sustainability preferences.
On 27 January 2022, ESMA opened a consultation on the draft guidelines which address the inclusion of sustainability preferences in a client’s suitability assessment from a practical perspective.
Commenting on the implementation of ESG sustainability requirements, Volker Lainer, regulatory expert at GoldenSource, says: “After only just waking up to the ESG MiFID II suitability regulatory update, many firms on the buy and sell-side are going live with a tactical data solution.
“This will be sufficient for managing data at a portfolio level, but the challenge is that data providers are making big progress in their ability to provide more granular instrument level data, suitable for the European ESG Template (EET).”
Lianer adds: “For many firms, their current approaches are not suitable for handling the volume and granularity of the data for making sense of the EET when it is ready. In order for market participants to utilise data effectively in suitability-related processes, they will need to evolve the tactical solutions into a more strategic solution capable of managing the enhanced data which will be fed in.”
Kifaya Belkaaloul, head of regulatory at NeoXam, comments: “This is an important change – ESG data is not only a vital part of the investment process, but also essential in adding weight to sustainability claims. The challenge this presents is that it requires firms to pull ESG data from multiple disparate sources, efficiently into a new format.
“Ultimately, the firms who have a solid data architecture in place are those whose reporting houses will stand solid against the winds of regulatory change.”
