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We bring together extraordinary people, like you, to build a better working world. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. The enthusiasm for sustainable finance is more than tangible, and the efforts led by European regulators are intensifying and involving all stakeholders. We are confident that MiFID II and the various regulations will ultimately bring more coordination and standardization for the benefit of clients. Our Financial Services Regulatory group in Ireland comprises of leading lawyers and experienced industry professionals with a wealth of experience in advising clients on regulatory requirements and how to manage regulatory risk within their business. Instead, the existing timeline requires asset managers to collect extra financial data from companies by other means. 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. 
After assessing the clients knowledge and experience, financial situation and other investment objectives, investment firms should clearly explain what sustainability preferences are and what environmental, social and governance means. It is thus acknowledged that certain SFDR Article 8 products will not align with a client's sustainability preferences, per the extract below: 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. 0000000016 00000 n
Systematically asking investors, at the outset of the sales process, to indicate specifically if they have a preference for ESG products, in the detailed way prescribed, could cause a radical shift in the demand levels for ESG financial products. 
Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions). 
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Insurance Distribution Directive /2016/97/EU. This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. 713 0 obj How Has 2022's Carnage Reshaped Global Stock and Bond Markets? Individual portfolio management teams may hold different views and may take different investment decisions for different clients. 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.
Heike Schmitz,Partner,Herbert Smith Freehills LLP
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. 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.
A wide range of new EU sustainable finance measures come into force on 1 August 2022. This sequence requires us to collect extra-financial data from companies by other means. Portfolio Monitoring & Claims Verification, ISS ISO-Information Security Whitepaper (June 2021), Governance Analytics (Corporate Issuer Data Verification), Privacy (including cookies), Social Media & Legal.
In this new paradigm, the asset management industry plays a critical role: That of proposing a complete offering corresponding to the entire range of investor profiles, not only in terms of ESG preferences, but also risk appetite, portfolio diversification, liquidity, etc. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk. : 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. When you visit any website, it may store or retrieve information on your browser, mostly in the form of cookies. To define the optimal portfolio allocation according to an investors ESG preferences, technology will be essential to collect and process ESG data, and to ensure that it is properly taken into account in investment strategies. No Alignment with SFDR Categorisations
The main objective of MiFID II is to put the client back at the heart of the process, giving more voice to investors by allowing them to better articulate their investment choices. 684 0 obj Japan: +81.3.5217.7888 The answers to these questions will lead to an advanced level of portfolio customization, as well as allowing the harmonization of the ESG offering. <>/Metadata 15 0 R/Pages 14 0 R/StructTreeRoot 17 0 R/Type/Catalog/ViewerPreferences<>>> 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. 0000003360 00000 n How will July's numbers for the Consumer Price Index compare to June's?
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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. <>/Filter/FlateDecode/Index[17 666]/Length 45/Size 683/Type/XRef/W[1 1 1]>>stream
%PDF-1.4 % %%EOF 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.
In total, there are five Commission Delegated Regulations and two Commission Delegated Directives (collectively the "Delegated Acts"). It is essential that their completion leads to an inspiring exchange of information between client and adviser, rather than being an administrative formality. The market opportunity in U.S. residential mortgage-backed securities, Credit Indices Evolve with Enhanced Data Inputs, For institutional investors, ETFs can make meeting liquidity needs easier, Gold: the most effective commodity investment, 2021 Investment Outlook | Investing Beyond the Pandemic: A Reset for Portfolios, Ten ways retirement plan professionals add value to plan sponsors. Asia: +65.6830.7838 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. Case 1 - Product does not meet the clients initial sustainability preferences. 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. 0000021282 00000 n For further details, please liaise with your usual Maples Group contact or any of the below.
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They are usually only set in response to actions made by you which amount to a request for services, such as setting your privacy preferences, logging in or filling in forms. In coming years, implementing sustainable finance legislation will be a major project for the financial services industry. The third category relates to financial products that consider the PAIs of investments on sustainability factors. 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. SFDR Article 8 Financial Products Implications 0
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. Regulators will nonetheless be vigilant when interpreting legislation: The European Securities and Markets Authority (ESMA) has recently clarified this point further by providing the first elements of the prescriptive framework. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. 0000006314 00000 n 0000018125 00000 n 2022 Institutional Shareholder Services Inc. All rights reserved.
These cookies allow us to know which pages are the most and least popular and see how visitors move around the site. So, in theory, one investor could express a preference only for "environmentally sustainable investments and investments that consider sustainability factors" and another could express a preference for only "sustainable investments". endobj 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. Distributors will then have to make investment recommendations based on these preferences relating to sustainability. Be in line with the European taxonomy goals such as climate change mitigation and ecosystem protection. Starting in August, advisers and distributors of financial products will have to ask clients to specify their sustainable development investment preferences as part of the European agenda to direct capital to companies most active in the transition to a low carbon and inclusive economy. These three sustainability preference categories are separate and distinct. 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. Seasoned business advisor with a focus on strategy, customer & operations in the financial services industry. endobj
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. 0000001370 00000 n Subscribe to receive this weeks articles straight to your inbox.
Speakers: In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. 2020 EYGM Limited. ESMA has provided some useful guidance on this issue in its revised guidelines on MIFID II suitability requirements that are currently under consultation. Wealth management and capital markets experience. hbbbg`b``3 1x4>Fc8` $ Further Information To consistently deliver news, research and analysis to the executives who manage the flow of funds in the institutional investment market. All information these cookies collect is aggregated and therefore anonymous. Striving for a positive footprint, professionally and personally. ESMA Guidance Where a client does not answer the question whether he has sustainability preferences or answers no, the firm may consider this client as sustainability-neutral and recommend products both with and without sustainability-related features.
The information does not usually directly identify you, but it can give you a more personalized web experience. While much progress has already been made, there is further to go, not least to improve the quality and access of companies' ESG data.
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. Because we respect your right to privacy, you can choose not to allow some types of cookies. You may withdraw your consent to cookies at any time once you have entered the website through a link in the privacy policy, which you can find at the bottom of each page on the website. What do sustainability preferences mean for product governance and the product manufacturers target market concepts? Impact on Demand for ESG Financial Products The introduction of MiFID II should make sustainable funds even more attractive, but we will have to ensure that we maintain a balanced allocation of capital, in order to avoid too much concentration of investments. Please let us know if you accept our use of cookies. The sustainable investor for a changing world.
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). 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. They may also be used to personalize your experience on our website by remembering your preferences and settings. This la carte model presents a major challenge: Aligning the preferences with fund characteristics.
The investor may set its own minimum proportion for "sustainable investments" or its own elements to demonstrate that PAIs are being considered. Shantanu Naravane,Senior Associate,Herbert Smith Freehills LLP, Moderator: 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. investment strategy is defined and ask the client to adapt his/her preferences. If the client states that he/she has sustainability preferences, and the firm does not have any products with sustainability related factors available, this should also be documented in the suitability report.
714 0 obj Finally, technology is also a tool for teaching people. If you do not allow these cookies we will not know when you have visited our site, and will not be able to monitor its performance. Suite 3200 0000041108 00000 n This means investment firms should already launch their project on the basis of Guidelines included in the consultation.
Please note that articles may contain technical language. In effect, only the more materially ESG-focused products will be eligible for recommendation to the clients who express clear sustainability preferences. 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. 0000010289 00000 n 0000008824 00000 n Can Sustainable Labeling of Financial Products Prevent Greenwashing? All this will allow for a better diversified capital allocation and better risk control, aligned with the sustainability challenges. 3 MiFID II Delegated Regulation - Article 2 (7): sustainability preferences means a clients or potential clients choice as to whether and, if so, to what extent, one or more of the following financial instruments shall be integrated into his or her investment: (a) A financial instrument for which the client or potential client determines that a minimum proportion shall be invested in environmentally sustainable investments as defined in Article 2, point (1), of Regulation (EU) 2020/852 of the European Parliament and of the Council (*), (b) A financial instrument for which the client or potential client determines that a minimum proportion shall be invested in sustainable investments as defined in Article 2, point (17), of Regulation (EU) 2019/2088 of the European Parliament and of the Council (**), (c) A financial instrument that considers principal adverse impacts on sustainability factors where qualitative or quantitative elements demonstrating that consideration are determined by the client or potential client, Guidelines on certain aspects of the MiFID II suitabilityrequirements, Commission Delegated Regulation (EU) 2021/1253 of 21April 2021 amending Delegated Regulation (EU) 2017/565as regards the integration of sustainability factors, risks andpreferences into certain organizational requirements andoperating conditions for investment firms, Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments. In an explanatory memorandum to an earlier draft of the MIFID ESG Regulation, the European Commission noted that certain Article 8 products "might lack sustainability-related materiality". Select your location Close country language switcher, EY Luxembourg Consulting Partner, ESG Services Leader. Past performance is no guarantee for future returns. Discover how EY insights and services are helping to reframe the future of your industry. Main Office
We use cookies to give you the best user experience on our website. In the coming years, the implementation of sustainable finance legislation will be a major project for the asset management industry. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. The MiFID questionnaire used to harvest the investment preferences and determine product suitability will be key. 0000003892 00000 n 0000014762 00000 n 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. 0000000936 00000 n 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. For an explanation of how we use cookies on our website, please refer to our. 683 0 obj
In line with investor enthusiasm for sustainable finance, European regulators are intensifying their efforts and involving all stakeholders. 0000004566 00000 n Asset managers must ensure that the funds offered meet the expectations of clients and distributors according to a range of criteria. 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. At EY, our purpose is building a better working world. 1 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.
0000026475 00000 n 130 E. Randolph St. Recognising that many investment funds will not meet investor preferences when they are expressed in the abstract and without regard to the types of investment funds available, ESMA has proposed the option of getting the investor to adapt their preferences. We are confident that MiFID II and various other regulations will ultimately bring more standardisation to the benefit of clients. Case 3 - The client has no sustainability preference. Offering a product with sustainablefeatures to a client who expressed no interest (even when such features are disclosed) could undermine client relationships, in particular in case an ESG product underperforms from a financial perspective.
Market participants are confronted with numerous questions on the implementation of the amendments: How can I integrate and explain sustainability preferences in my client conversations and which products are eligible? financial objectives); and (ii) the client's risk tolerances, in order to be able to recommend suitable investments. 685 Third Avenue 0000029850 00000 n It was submitted and edited under Pensions & Investments guidelines, but is not a product of P&I's editorial team. While we welcome the significant progress made by this regulatory framework, this ambitious timetable could have been better ordered to require companies to disclose ESG data in a transparent and harmonized way, in order for asset managers to incorporate it in their fund offerings, and allowing distributors to ask investors about their sustainable investment preferences. 0000005744 00000 n EY EMEIA Wealth and Asset Management Consulting Senior Manager. Each distributor must draw up a questionnaire. 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). Passionate about achieving goals in teams. Then, the firm should assess the clients sustainability preferences by identifying: The Guidelines also address some special cases an investment firm can face, for example, when the client has no sustainability preference or when the product does not fit their preference. Are You Ready for Sustainability Preferences Under MiFID II and IDD? 683 32
Dedicated to embrace and manage change. 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. How this aspect is formulated in the finalised guidelines could be critical to how distributors can match investor preferences with available financial product options, at least in the short term, as the regime change comes on stream. 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. Doubts also remain in relation to potential repercussions of classifying clients with no sustainability preference as sustainable neutral. Tech savvy. Next, the Corporate Sustainability Reporting Directive (CSRD) directive, still under discussion, aims to strengthen companies financial and ESG reporting obligations from 2024. Environmentally sustainable investments - Financial instruments that pursue a minimum proportion of sustainable investments in economic activities that qualify as environmentally sustainable under Article 3 of the Taxonomy Regulation; Sustainable investments - Financial instruments that pursue a minimum proportion of sustainable investments, as defined in Article 2, point (17), of SFDR, where the minimum proportion is determined by the client or potential client; and.
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