New Sustainability Standards by European Parliament Under MiFID II
As part of the second Markets in Financial Instruments Directive, the European Parliament and Council of the European Union have established new ESG suitability standards (MiFID II).
The most significant market change will be the incorporation of new sustainability parameters for investment firms that comply with MiFID II.
According to the European Securities and Markets Authority, the suitability assessment is one of the most essential investor protections under MiFID II (ESMA).
The evaluation applies to all forms of investment advice (whether independent or not) and portfolio management.
The original Directive, which went into effect on January 3, 2018, aims to strengthen investor protection and enhance the functioning of financial markets.
In August 2021, the European Commission issued a delegated regulation mandating that investment businesses identify the sustainability preferences of their clients.
The European Securities and Markets Authority (ESMA) published a consultation on the draft guidelines addressing the practical inclusion of sustainability preferences in a client's suitability assessment on January 27, 2022.
Volker Lainer, regulatory expert at GoldenSource, said:
“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 great progress in their ability to provide more granular instrument-level data, suitable for the European ESG Template (EET).
“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. 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, commented:
“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 that have a solid data architecture in place are those whose reporting houses will stand solid against the winds of regulatory change.”
Source: Asset Servicing Times