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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. Substance: Juggling with tax, TP, regulatory and operational requirements, Lassurance de demain na jamais t aussi prsente. 0000012682 00000 n
We use cookies to give you the best user experience on our website. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. Since 2018, we have been using a proprietary methodology to collect data on E, S, and G criteria from more than 13,000 issuers, complemented by data of different types and from other sources. The revision of the European Unions MiFID II directive taking effect this August and requiring investment firms to assess clients sustainability preferences sets a regulatory priority that will impact asset management professionals in 2022 and beyond. They may also be used to personalize your experience on our website by remembering your preferences and settings. 0000008824 00000 n
: 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. The information does not usually directly identify you, but it can give you a more personalized web experience. Some emerging markets offer less security than the majority of international developed markets. In effect, only the more materially ESG-focused products will be eligible for recommendation to the clients who express clear sustainability preferences. 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. We will also provide you with a brief overview of upcoming sustainability disclosure duties and investment labels in the UK. When designing their assessment process and drafting their questionnaires, investment firms should consider that most product manufacturers are currently adopting a prudent approach when committing to a rate of Taxonomy-alignment or of sustainable investment. Case 3 - The client has no sustainability preference. However, blocking some types of cookies may impact your experience of the site and the services we can offer. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. Non-ESG Financial Products For further details, please see our previous Sustainable Finance: New EU Delegated Legislation client update. In total, there are five Commission Delegated Regulations and two Commission Delegated Directives (collectively the "Delegated Acts"). In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. Wealth management and capital markets experience. 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. 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. EY helps clients create long-term value for all stakeholders. 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. Main Office Broader projects may also be required to ensure communication is clear, concise and not technical while ensuring an optimal client experience on all channels (including mobile devices). 0000004566 00000 n
endobj 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. These three sustainability preference categories are separate and distinct. 0000029850 00000 n
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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. 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. If we explore this to its logical conclusion, it is reasonable to determine that, in time, a simple Article 8 categorisation will not be considered sufficiently ESG focused (or 'green enough') to meet the sustainability preferences of clients investing through MIFID distribution channels. 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. 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. Each distributor must draw up a questionnaire. All this will allow for a better diversified capital allocation and better risk control, aligned with the sustainability challenges. 0000010289 00000 n
Impact on Demand for ESG Financial Products What do sustainability preferences mean for product governance and the product manufacturers target market concepts? With MiFID II taking effect from August 2022, Level 2 regulatory technical standards will apply from Jan. 1, 2023. xref
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. 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 Regulatiation1(the Guidelines). Guidelines on certain aspects of the MiFID II suitability, 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, The clients knowledge and experience in the investment field relevant to the specific type of product or service, The persons financial situation including their ability to bear losses and, Their investment objectives including their risk tolerance so as to enable the investment firm to recommend to the client or potential client the investment services and financial instruments that are suitable for him/her and, in particular, that are in accordance with their risk tolerance and ability to bear losses, Detailed reporting requirements applicable to investment products, which will become applicable as from 1 January 2023, Reporting of taxonomy-alignment by companies in scope of the Non-Financial Reporting Directive, which will become applicable as from 1 January 2023 for non-financial undertakings and from 1 January 2024 for financial undertakings, Whether the client has any sustainability preferences, If so, to what extent the client has sustainability preferences with regard to (a) environmentally sustainable investments,(b) sustainable investments and (c) financial instruments that consider principal adverse impacts (PAIs), For aspects a) and b), what are the clients preferences in terms of minimum proportion, For aspect c), which PAIs should be considered including quantitative and qualitative criteria demonstrating that consideration, Whether the client has a focus on either environmental, social or governance criteria or a combination of them or whether the client does not have such a focus, Which part of the portfolio (if any) the client wants to be invested in products meeting the clients sustainability preferences. Insightful adviser. 2020 EYGM Limited. It concerns environmental, social and governance criteria, product alignment with the European taxonomy and negative investment externalities. In line with investor enthusiasm for sustainable finance, European regulators are intensifying their efforts and involving all stakeholders. In addition to cookies that are strictly necessary to operate this website, we use the following types of cookies to improve your experience and our services:Functional cookiesto enhance your experience (e.g. Select your location Close country language switcher, EY Luxembourg Consulting Partner, ESG Services Leader. There is further to go, not least to improve the quality and access of companies ESG data. 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. 0000003360 00000 n
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. Instead, the existing timeline requires asset managers to collect extra financial data from companies by other means. 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. trailer Thomas Harding,Associate V.P.,Regulatory Solutions Lead,ISS ESG 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. It was submitted and edited under Pensions & Investments guidelines, but is not a product of P&I's editorial team. Case 1 - Product does not meet the clients initial sustainability preferences. Press inquiries should be directed to the ISS Press Office. To consistently deliver news, research and analysis to the executives who manage the flow of funds in the institutional investment market. 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. It is essential that their completion leads to an inspiring exchange of information between client and adviser, rather than being an administrative formality. The decision of the client should be documented. 0000005166 00000 n
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). 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). At EY, our purpose is building a better working world. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk. 0000035383 00000 n
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". This is part of the European agenda to direct capital to companies most active in the transition to a low carbon and inclusive economy. Can Sustainable Labeling of Financial Products Prevent Greenwashing? ESMA has provided some useful guidance on this issue in its revised guidelines on MIFID II suitability requirements that are currently under consultation. ESMA Guidance All information these cookies collect is aggregated and therefore anonymous. How Has 2022's Carnage Reshaped Global Stock and Bond Markets? Marina Reason,Partner,Herbert Smith Freehills LLP 0000004452 00000 n
Where a firm intends to recommend a product that does not meet the initial sustainability preferences of the client in the context of investment advice, it can only do so once the client has adapted his/her sustainability preferences. 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. Tech savvy. 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. Taxonomy and Sustainable Finance Disclosure Regulation (SFDR) have dominated the public discussion while the upcoming amendments to MiFID II and IDD have attracted significantly less public attention. 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. Heike Schmitz,Partner,Herbert Smith Freehills LLP All information collected is anonymous unless you provide personal information to us. While much progress has already been made, there is further to go, not least to improve the quality and access of companies' ESG data. These cookies allow us to know which pages are the most and least popular and see how visitors move around the site. EY EMEIA Wealth and Asset Management Consulting Senior Manager. 683 32
A wide range of new EU sustainable finance measures come into force on 1 August 2022. In line with the stated objectives, funds will have to either: Currently, BNP Paribas Asset Managements offering includes a product range integrating ESG criteria with more than EUR 330 billion in assets under management (end December 2021) covering a broad set sectors and geographies. Fifteen-plus years of experience in the financial services industry. After the introduction of MiFID II, level 2 regulatory technical standards will apply from 1 January 2023. Please check the boxes below to subscribe, Investment strategies and asset allocation, Our latest regular features, outlooks and reports, Article "{postName}" added to your bookmarks, Article "{postName}" removed from your bookmarks, Limit negative impacts such as greenhouse gas emissions or gender wage inequality, Integrate a proportion of assets defined as sustainable. 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. EY is a global leader in assurance, consulting, strategy and transactions, and tax services. startxref In coming years, implementing sustainable finance legislation will be a major project for the financial services industry. These questionnaires have yet to be finalized, although we hope that distributors will have some discretion in their construction. 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. : some disclosures related to taxonomy-alignment and principal adverse impacts are not yet available due to the future application dates of: swiftly adapt their client information collection processes in a fast- moving and highly competitive environment. 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? The answers to these questions will lead to an advanced level of portfolio customization, as well as allowing the harmonization of the ESG offering. 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. The main changes included by the Delegated Regulation and addressed by the Guidelines are: The collection of information from clients on sustainability preferences: identify the clients preferences in relation to the different types of sustainable investment products and to what extent they want to invest in them, The assessment of sustainability preferences: identify the products that meet the clients sustainability preferences, The organizational requirements: provide staff with appropriate training on sustainability topics and keep updated records of the sustainability preferences of the client. We welcome and will contribute to regulators' efforts to increase the transparency of available information, and actively engage with policymakers and governments to help them shape the markets we invest in and the rules that guide and govern corporate behavior. Get access to the news, research and analysis of events affecting the retirement and institutional money management businesses from a worldwide network of reporters and editors. Choose your news we will deliver. Other financial products can still be offered to clients, but they will not be eligible for recommendation to clients that have expressed specific sustainability preferences. When you visit any website, it may store or retrieve information on your browser, mostly in the form of cookies. These cookies do not store any personally identifiable information. 0000005744 00000 n
Past performance is no guarantee for future returns. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. At BNPP AM, we have been using our proprietary scoring methodology since 2018, covering more than 13 000 issuers, to gather data on various ESG criteria, which we complete with information from other sources. 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. These changes not only represent a new legal framework, they mark an important step toward reallocating capital towards the ecological transition and social issues. Dedicated to embrace and manage change. This means investment firms should already launch their project on the basis of Guidelines included in the consultation. <> investment strategy is defined and ask the client to adapt his/her preferences. Depending on the objectives, funds will either have to limit the principal adverse impacts (PAI), such as greenhouse gas emissions or gender wage inequality, or integrate a proportion of assets defined as "sustainable" or in line with the European taxonomy, such as climate change mitigation or ecosystem protection. They integrate sustainability issues and considerations into the following EU legislative regimes: The Delegated Acts complement the obligations in Regulation (EU) 2019/2088("SFDR") and Regulation (EU) 2020/852("Taxonomy Regulation") and form part of the European Commission's 'ambitious and comprehensive' package of measures to help improve the flow of money towards sustainable activities across the EU. Inquiries about ISS products and services, requests for copies of proxy research reports, and requests to engage with ISS regarding research reports and policies should be directed to the Help Center. 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. Let us not forget that this represents much more than a new legal framework, it is an important step towards reallocating capital towards the ecological transition and social issues. Be in line with the European taxonomy goals such as climate change mitigation and ecosystem protection. Seasoned business advisor with a focus on strategy, customer & operations in the financial services industry. Asia: +65.6830.7838 However, matching financial products to what could be highly specific and aspirational preferences could be quite a challenge and it may, therefore, be quite difficult to design a financial product that is fully 'sustainability preferences' eligible in all cases. The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Sustainability Preferences We see this as a welcome initiative that should lead to harmonised questionnaires. 683 0 obj 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. This could also be an important factor for Level 2 of SFDR (in force from 1 January 2023) and play a part in how firms develop detailed disclosures for ESG-focused funds' prospectuses, websites and periodic reports. How do you move long-term value creation from ambition to action?
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