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ESG preferences and MiFID suitability

Investment advisors and portfolio managers will soon be required to incorporate clients’ sustainablity (or ESG) preferences into their suitability assessments – what kind of challenges will this pose?

In recent years, climate change, sustainability and good governance have all risen rapidly up the regulatory agenda. Whereas only a few years ago climate change was considered to fall primarily within firms’ corporate social responsibility agenda, it is now at the heart of much recent financial services policy making and regulation.

This rising focus on environmental issues has occurred against a backdrop in which good governance, culture and strong accountability are now central to many post-financial crisis conduct frameworks.

At an EU level, the European Commission has developed a wide ranging Sustainable Finance Action Plan (SFAP) , which includes initiatives to create a Taxonomy which identifies which business activities are sustainable, and a Disclosures framework which requires manufacturers of financial products and financial advisors to disclose how they have integrated sustainability risks into their investment decision making.

As part of the SFAP, the MiFID suitability requirements which aim to ensure that clients’ objectives, risk, time horizons and other individual requirements are taken into account by firms prior to investment advice/decisions, will be amended to require that firms also take into account clients’ ESG preferences.

The new rules are largely un-prescriptive with regards to how suitability processes should be amended to incorporate the new requirements – as such this this report sets out some challenges relevant firms may face and ideas on how they might approach these.

Suitability is an area that already attracts significant supervisory and regulatory scrutiny, both from ESMA and from national regulators such as the FCA. Once in force, the requirements for firms to consider clients’ ESG preferences are likely to attract similar high levels of attention.

At the time of writing it is unclear whether, and to what extent, these new suitability rules will be adopted in the UK following the end of the transition period. City Minister, John Glen, has said that the UK is committed to “at least match the ambition of the objectives of the EU Sustainable Finance Action Plan” suggesting that broadly equivalent rules will be adopted in the UK, even if they do not exactly match the EU’s. Accordingly, UK wealth managers would also benefit from familiarizing themselves with these rules and any operational changes these may involve.

The Deloitte Centre for Regulatory Strategy is a powerful resource of information and insight, designed to assist financial institutions manage the complexity and convergence of rapidly increasing new regulation.

With regional hubs in the Americas, Asia Pacific and EMEA, the Centre combines the strength of Deloitte’s regional and international network of experienced risk, regulatory, and industry professionals – including a deep roster of former regulators, industry specialists, and business advisers – with a rich understanding of the impact of regulations on business models and strategy.

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