MiFID II ESG amendments apply from 2 Aug– are you ready?


MiFID II ESG amendments apply now – are you ready?

New requirements for banks and investment firms to integrate sustainability into their suitability assessments and product governance

Against the backdrop of climate change and a myriad of social issues, sustainability has rightfully risen high on the regulatory agenda. The European Commission (EC) has developed a broad Sustainable Finance Action Plan (SFAP) that aims to reorient capital flows towards sustainable investments, mainstream sustainability into risk management and foster transparency and long-termism in financial activity. SFAP introduces new sustainability related disclosure requirements through the Sustainable Finance Disclosure Regulation (SFDR), a taxonomy setting out a list of sustainable activities through the EU Taxonomy, and Environment, Social, Governance (ESG) embedment in the updated MiFID II framework. This blog outlines the timelines and discusses what the ESG updates in the MiFID II framework mean in practice and the challenges they pose.

Key takeaways

  • The MiFID II ESG amendments apply to banks and investment firms that manufacture and distribute MiFID products;
  • The amendments are coming into force in two phases. Firstly on 2 August 2022, when sustainability preferences have to be integrated into suitability assessments. And secondly on 22 November 2022, when sustainability objectives and factors have to be integrated into product governance;
  • The European Securities Markets Authority (ESMA) still has to publish final guidelines on implementing the two phases.

How has MiFID II been amended?

MiFID II came into force in January 20181 with the aim of making European financial markets more efficient and transparent by increasing investor protection. Under the existing framework, firms providing investment advice and portfolio management services have to obtain information on their clients’ financial objectives, whereas clients’ non-financial objectives – such as their sustainability preferences2 – are not usually addressed.

MiFID II has been amended through two delegated regulations (2021/1253 and 2021/1269) as part of the SFAP. These amendments impact on organizational requirements and product governance conditions.

Delegated Regulation 2021/1253 (amending Regulation 2017/565)

The MiFID II framework integrates clients’ sustainability preferences into investment advice through Delegated Regulation 2021/1253. The changes applying from 2 August 2022 include the requirement to integrate sustainability factors, risks and preferences into:

  • Organizational requirements3
    Risks related to sustainability must also be taken into account in organizational requirements such as reporting, processes and internal policies.
  • Conflicts of interest4
    To ensure high investor protection, investment advice has to identify conflicts of interests that may arise as a result of integrating a client’s sustainability preferences.
  • Product suitability assessment5
    Distributors now also have to obtain information about clients’ sustainability preferences to determine their suitability for a particular product. Obtaining these preferences is a secondary step, and so this information should not be incorporated until a financial instrument has been found to meet the client’s investment objectives, risk tolerance and financial status. For existing clients, for whom a suitability assessment has already been performed, investment firms must identify the client’s individual sustainability preferences at the next regular update of the assessment.

Delegated Regulation 2021/1269 (amending Directive 2017/593)

Delegated Regulation 2021/1269 has amended the MiFID II framework for manufacturers of financial products. As a result, sustainability factors have to be integrated into product governance. The changes applying from 22 November 2022 include:

  • Target market analysis6
    Manufacturers of investment products have to factor sustainability-related objectives, such as client preferences, into each product. Sustainability-related objectives also need to be considered in potential target market identification processes and distribution channels.
  • Review
    When periodically reviewing their financial products, manufacturers must consider whether the sustainability-related objectives are still consistent.
  • Product governance arrangements7
    Investment firms must have adequate product governance arrangements in place to ensure that products and services they intend to offer or recmmend are compatible with clients’ needs, characteristics and objectives, including any sustainability-related objectives.

What do these changes mean on a practical level?

The MiFID II ESG amendments are coming into effect alongside various other sustainable finance-related regulatory requirements for the investment industry. It is crucial, therefore, to understand the new definitions and requirements before applying them in practice.

MiFID II ESG amendments require investments firms to:

  • Determine whether the product – including sustainability factors and the risk/reward profile – meets the target market’s needs;
  • Regularly review whether the product remains consistent with the target market’s needs, including its sustainability preferences;
  • Describe how sustainability factors were taken into account in the investment advice process;
  • Establish and consider clients’ sustainability preferences for transactions recommended or executed;
  • Obtain information about clients’ sustainability preferences as part of their investment objectives;
  • Include and demonstrate that sustainability factors have been included in the policies and that procedures used to ensure the nature of financial instruments selected for clients are properly understood;
  • Illustrate in suitability reports how services provided meet clients’ expressed sustainability preferences;
  • Ensure that including sustainability factors in the advisory process and portfolio management does not lead to greenwashing or mis-selling or to instruments or strategies being misrepresented as fulfilling sustainability preferences when they do not actually do so;
  • Maintain records of any changes in clients’ sustainability preferences.

Challenges regarding compliance with MiFID II ESG amendments

Narrow implementation timeline
ESMA consulted on the draft suitability assessment guidelines between January and April 2022. The final guidelines are expected to be published after the 2 August 2022 timeline for implementing Delegated Regulation 2021/1253. Similarly, ESMA is consulting on the review of the product governance guidelines. The final guidelines are expected to be published close to or after the 2 November 2022 timeline for implementing changes required under Delegated Regulation 2021/1269. Firms therefore have to kickstart their compliance projects, based on the draft guidelines in the consultation.

Educating clients on ESG
The amendments also require investment firms to educate their clients on ESG investing. In other words, not only explaining what defines ESG investing, but also providing extended definitions of the individual E, S and G components so that clients can make informed decisions. Taxonomy alignment and a clearly defined and easy-to-explain internal rating system for investee companies are therefore essential. Ensuring that client-facing staff can meet these requirements will also require firms to have strict guidelines and instructions in place, including training and awareness sessions.

Misalignment between product offering and client preferences
Complying with the MiFID II ESG amendments requires a thorough understanding of how sustainability is integrated into the firm’s overall strategy. This overall strategy significantly impacts on sustainability-related issues in the suitability assessments. Completing a suitability assessment without first defining the firm’s sustainability strategy runs a high risk of misalignment between product offerings and clients’ indicated preferences.

Informing clients of ESG investment performance
Obtaining clients’ risk profiles and providing them with examples of practical investment risk and return scenarios are inherent parts of any suitability assessment. A lack of substantive historical data on how ESG investments perform, how certain risks affect their performance and how their returns compare with conventional investment portfolios poses challenges for investment firms. It is therefore crucial to inform clients about how taking their sustainability preferences into account may affect returns on their conventional portfolios. Clients should also be provided with quantified examples or ranges to see how incorporating different levels of sustainability preferences may affect those returns.

Lack of data on investee companies
Historically, businesses have not disclosed how their activities impact on the environment and societies in which they operate. But although regulatory and investor pressure is now increasingly compelling them to produce extensive data on these impacts, this practice is still in infancy. This makes it difficult to determine whether companies’ equities and bonds have the E, S and G characteristics defined in the EU taxonomy. While the ESG data market is set to grow exponentially in the coming years, investments firms should be prepared to explain the current data limitations to investors, as well as to incorporate a varied range of questions into their assessments so to ascertain clients’ willingness to bear losses resulting from considering sustainability preferences and ensure that clients understand the risk and return trade-offs of sustainable investing.

Where to start?

MiFID II ESG compliance requires a host of activities, all starting with defining your sustainability strategy and aligning it with business aspects:

  • Define your in-house strategy on sustainability and ensure your investment advice and product offerings align with the ESG questions you ask clients in your suitability assessments;
  • Determine the E, S and G issues that are material to your product offering;
  • Assess whether you need to expand or modify your product offering;
  • Decide whether to include the modifications in your existing suitability questionnaires or whether a different form of assessment would be more practical;
  • Determine how extensive the questionnaire needs to be and whether any aspect of the suitability assessment could involve a perceived risk of greenwashing;
  • Discuss and agree on the type of performance scenarios you will use to explain ESG-related risk/return trade-offs to clients and how you will ensure the data used in these scenarios are accurate and how you will disclose data limitations to clients;
  • Match the types of responses in the questionnaire with your product offering and identify the timeframe for following up with clients in the event of indications of conflict;
  • Determine when and how often clients have to review their preferences outside the annual update;
  • Assess whether you have sufficient information about the costs associated with switching products and how to explain them to clients;
  • Set up a sustainability preferences outreach for existing clients before August 2022;
  • Train client-facing staff to ensure they have accurate knowledge and experience of the criteria to be used for sustainability preferences.


The MiFID II ESG amendments mark another step forward by the EU towards operationalizing the European Green Deal. Asking investors to specifically indicate their ESG preferences at the onset of the sales process is a step in the right direction and may fundamentally shift demand for ESG financial products. Putting these amendments into practice, however, will pose challenges for firms. Not least because MiFID II is linked to other regulations – such as the Corporate Sustainability Reporting Directive (CSRD), EU taxonomy and SFDR – that are currently still being implemented. The information stream can only become seamless once these regulations have been fully implemented. Implementation of the CSRD, for example, has been postponed by at least a year, and this limits the availability of data on potential investee firms. But growth spurts are part of every new regulatory initiative, and the MiFID II ESG amendments are no exception.

1.Delegated Regulation (EU), 2017/565.
2.A client preference for (i) a minimum proportion of EU taxonomy investments, (ii) a minimum proportion of SFDR sustainable investments or (iii) consideration of principal adverse impacts (‘PAIs’) on sustainability factors set out in the SFDR RTS, either qualitatively or quantitatively, with clients able to specify minimum proportions or qualitative/quantitative elements in each case.
3.Amended Article 21, Delegated Regulation (EU), 2017/565.
4.Amended Article 23, Delegated Regulation (EU), 2017/565.
5.Amended Article 54, Delegated Regulation (EU), 2017/565.
6.Amended Article 9, Delegated Directive (EU), 2017/593.
7.Amended Article 10, Delegated Directive (EU), 2017/593.

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