Key Takeaways
- MiFID II sustainability preferences face increased scrutiny, with ESMA and member states identifying gaps in compliance, such as failing to ask clients about sustainability preferences or explain key terms.
- Financial firms must ensure accurate ESG data, improve client understanding of sustainability products, and align offerings with client preferences to meet regulatory expectations.
- Tools from Infront and Clarity AI provide high-quality ESG data and seamless integration, helping financial institutions stay compliant and deliver added value to clients.
Due to amendments to the MiFID II regulation effective since August 2022, distributors of financial instruments in the EU have been required to collect clients’ sustainability preferences to ensure any financial products sold to them are suitable.
This regulation primarily applies to investment firms offering investment advice (including Robo-advice) and portfolio management (e.g. wealth managers), but also applies to credit institutions, asset managers, and investment advisers who offer advice or portfolio management. The parallel regulation impacting insurance companies and brokers (via the Insurance Distribution Directive, IDD) mirrors the requirements under MiFID II.
In the past months, regulatory scrutiny on MiFID II sustainability preferences has increased. In this article, we aim to help financial advisors, wealth managers, and compliance officers navigate these regulatory shifts. We will explore common themes from regulatory bodies and look at what tools you can use to not only stay compliant but also provide value-added services around ESG.
Understanding the Challenges of ESMA’s Sustainability Guidelines
ESMA’s guidelines on how to collect and match sustainability preferences came into force in October 2023. These guidelines stipulate that distributors of financial products within the EU must ask clients about their sustainability preferences in terms of any or all of:
- A minimum % of alignment to the EU taxonomy.
- A minimum % of sustainable investment (as defined by Article 2(17) of Sustainable Finance Disclosure Regulation (SFDR)
- Financial products that consider principal adverse impacts (PAIs) on sustainability factors
While the idea of matching products to the sustainability preferences of investors is an inherently sensible idea, the implementation of MiFID II sustainability preferences has not been without its hiccups. We have observed a range of market practices with varying levels of compliance. Examples of challenges include:
- Accessing data on the sustainability profile of the products being offered.
- Not engaging the client to ask about their preferences.
- Clients not understanding key terminology such as Taxonomy, SFDR or PAIs and distributors not taking the time to explain.
That is why, in 2024, ESMA launched a common supervisory activity (CSA). The CSA, launched through ESMA’s national competent authorities, aimed at assessing the level of compliance within the industry in collecting and matching clients’ sustainability preferences to the products they are sold. As a result of this, we have observed an increase in regulatory scrutiny over MiFID II sustainability preferences throughout 2024 and expect it to continue to grow into 2025.
Member States Implementation of the ESMA CSA
Below, we provide an overview of key themes and actions emerging from EU member state regulatory bodies as they work to implement and monitor compliance with MiFID II sustainability preferences. These insights shed light on how different regions are approaching the challenge of aligning financial intermediaries with ESG-related regulations.
Italy
In July 2024, the Italian financial regulator CONSOB issued a bulletin reviewing the local implementation of MIFID II, with a specific focus on how financial intermediaries take the sustainability preferences of their clients into account when recommending financial products. As sustainability and ESG considerations continue to evolve across the financial landscape, this bulletin is an important milestone for financial institutions in Italy.
France
Participation in ESMA’s CSA was mentioned as part of the local regulator’s priority work plan for 2024. In June 2024, the AMF also published results of its “mystery shopping” exercise to observe the implementation of MiFID II sustainability preferences across banks in France. It found that a third of advisers were not asking about sustainability preferences and even fewer were following the regulatory steps of asking specifically about taxonomy, sustainable investment or PAIs.
Other Member States
The CSSF Luxembourg, CNMV Spain, BaFIN Germany and Sweden FI have all made references to paying closer attention to MiFID II sustainability preferences as part of their current or future work plans.
Implications for Distributors of Financial Products in the EU
As regulatory expectations around ESG compliance continue to evolve, financial intermediaries face increasing pressure to adapt their practices. Below are key insights into the areas where compliance efforts must focus to meet these heightened standards:
- Demand for Accuracy and Timeliness in Compliance: Regulators have emphasized the need for financial intermediaries to ensure that sustainability information, including as mandated by the SFDR and MIFID II, is readily accessible and accurate. This includes having solutions in place that enable easy navigation on intermediary websites to sustainability-related data at both the product and entity level.
- Improving Understandability for End Clients: Regulators also highlight the importance of ensuring that clients can easily understand the connection between ESG product selection and their personal sustainability preferences. Intermediaries must provide simple explanations about the correlation on the basis of sustainability risk and impact, and be able to satisfy the sustainability preferences of clients, ensuring clarity at every step of the process.
- Supervisory Action on ESG Compliance: Regulators, including CONSOB, have initiated supervisory action to monitor how financial intermediaries are implementing the EU’s sustainable finance provisions. This further intensifies the need for financial institutions to act swiftly and accurately, as compliance will be subject to increased scrutiny.
Infront and Clarity AI Provide ESG Data for Sustainable Investment Decisions
As the regulatory landscape evolves, so too must the tools that financial advisors and wealth managers rely on to ensure compliance and maximize the impact of sustainable investments. This is where Infront comes in, in collaboration with Clarity AI.
Infront WealthTech solutions provide access to one of the most comprehensive ESG data universes in the industry. Working together with Clarity AI, Infront offers data from over 30,000 companies, 400,000+ funds, and 400+ countries and governments. By leveraging high-quality, science-based data from Clarity AI, you can confidently assess ESG risks and opportunities, ensuring that your investment decisions align with both regulatory requirements and client preferences.
Benefits of Infront and Clarity AI ESG data
1. Quality sustainability data:
As a sustainability tech company, Clarity AI collects the relevant metrics (SFDR PAI, % of sustainable investment, and EU Taxonomy) from companies through their thorough data collection process. Using Natural Language Processing (NLP) Algorithms, Clarity AI is able to select the most reliable datapoint from over 50 raw datasets (company sustainability reports and EETs, news articles, etc.) This process ensures that clients always have the most relevant metrics as dictated by the regulations and are able to identify factors that drive the sustainability performance.
2. Integrated financial and extra-financial analysis and reporting:
The partnership between Infront and Clarity AI enables financial advisors to seamlessly integrate sustainability data with financial risk considerations. This holistic approach allows you to provide clients with information that balances ESG performance with financial returns, helping them make informed decisions that align with their values and risk profiles.
3. Fast implementation:
Thanks to a “plug and play” solution, financial institutions can quickly integrate ESG screening and analysis into their existing workflows. Our user-friendly interface connects the back-end ESG data and analysis to the front-end client portal, allowing you to offer clients an intuitive and comprehensive view of their investment’s sustainability performance. This fast implementation helps you stay ahead of the regulatory curve without disrupting your business operations.
As the recent ESMA activity makes clear, regulatory pressure around ESG is only going to increase. For financial institutions and wealth managers, this presents both a challenge and an opportunity. The challenge of staying compliant in an evolving regulatory landscape, and the opportunity to enhance client relationships by offering clarity around ESG investments and delivering in line with their preferences.
If you’re ready to take the next step in ESG compliance and client service, contact Infront today to learn more about how Infront and Clarity AI can help you stay ahead of the curve.
