Today, the Commission released a bumper package of sustainable finance legislation, including the ESG rules amending current MiFID II / UCITS / AIFMD / insurance regimes (as well as the more or less final version of the Taxonomy screening criteria for climate change and the proposal for the new Corporate Sustainability Reporting Directive).

Timing for the new rules:

  • These rules, in the form of amending delegated acts, will now be subject to a scrutiny period by the Parliament / Council (at least 3 months). If no objections are raised, the rules will be published in the OJEU and enter into force.
  • The delegated acts give 12 months for market participants to implement the requirements and so are expected to take effect from October 2022.

Any problems?

Compared to the draft delegated acts published in July last year, there have been a few unhelpful developments in the MiFID II / insurance suitability context.

These rules require MiFID firms and insurance undertakings / distributors to incorporate ESG considerations in:

  • Suitability assessments, by reference to the “sustainability preferences” of their clients. The definition of sustainability preferences now refers to a preference expressed by the client for financial instruments that: (i) have a minimum proportion of Taxonomy compliance or a minimum proportion of SFDR sustainable investments – and the minimum proportion will be set by the client; or (ii) consider PASIs, but in accordance with qualitative or quantitative elements set by the client.
  • There is also a specific prohibition on firms recommending or, in the case of portfolio management activities, trading in financial instruments that do not meet the client’s sustainability preferences (firms must explain to clients and document their reasons in this regard). Additionally, where no instruments meet the client’s sustainability preferences and the client adapts its preferences as a consequence – firms must keep a record of the client’s reasons for the change.

These are quite unhelpful developments, as they basically give clients the ability to specify bespoke ESG preferences (which could impact on firms’ abilities to provide standardised ESG offerings) and it seems like all financial instruments (not just SFDR instruments) are in scope – and so firms will need to potentially do their own Taxonomy and SFDR assessment of shares, bonds etc. (although where the issuer has published corporate disclosures under the Taxonomy Regulation, firms should be able to leverage that information).

  • Product governance, by reference to “the “sustainability related objectives” of the target market – this is a much broader, and arguably more flexible standard compared to the previous iteration of these rules and makes the regime more appropriate for products not in scope of SFDR. Manufacturers are also required to disclose any “sustainability factors” that are considered by the financial instrument.

AIFMs, UCITS ManCos, MiFID firms and insurance undertakings / distributors are also required to incorporate sustainability risks and considerations in their:

  • risk management and conflicts processes;
  • investment due diligence processes (AIFMs and UCITS ManCos only);

Note: unlike the SFDR which imposes disclosure based obligations, these amendments will impose positive obligations on in scope firms to incorporate / consider ESG (i.e. disclosure / disclaimers will not be sufficient).

Links to the six delegated acts can be found on this webpage -Sustainable finance package | European Commission (europa.eu)