MIFID 2 and Green finance: impacts and changes for market players


Due to ‘’SFDR*’’ (level one effective since 10 March 2021 and level 2/RTS as from January 2023), some amendments to the Markets in Financial Instruments Directive (MiFID) II and the Insurance Distribution Directive (IDD) have been made with this Delegated Regulation 2021/1253 on new suitability assessment requirements.

This means that, from 2 August 2022, investment firms must consider sustainability risks in all decision-making procedures and when providing financial advice, must obtain sustainability preferences from their clients as part of the suitability process. The new suitability assessment requirements under the EU MiFID Directive are an ambitious event in the European Commission’s Sustainable Finance Action Plan.

As a reminder, MiFID applies to investment advice and portfolio management activity. To ensure that financial products are in line with investors’ values, a new version for suitability testing will be structured to collect investors’ preferences with regard to green investments. The information provided to (retail) investors to evaluate proposed funds must be accurate, fair, clear, simple, concise and not misleading (Article 8(3) and 9(5) SFDR). The new MiFID regulation aims to promote sustainable finance products, avoiding green marketing and fighting greenwashing.

Distributors, as financial market participants under ‘’SFDR’’, will thus need to ask their clients several key questions concerning their wish or not to invest in sustainable stocks. Should the client answer that he does wish to make green investments, the distributor will then ask how much of their portfolio they want to focus on sustainability options.

This must be based on the European Union definition and the use of SFDR flag filters as a starting point for screening. These filters make it possible to know how to qualify a portfolio: article 8 or 9 etc. However, this remains a challenge without a definition of sustainability and while the future green industry is facing different methodologies for assessing ESG1 factors.

There is a real interest from distributors and asset managers to understand their clients’ sustainability preferences. Asset managers can look at different ways of considering sustainable investment. They can apply exclusions, limit ESG risk exposure, seek ESG opportunities, and/or target sustainability themes.

Before SFDR, some asset managers had their own definition and criteria when selecting green investments and great flexibility to decide what could be green or not green, sustainable or not sustainable, by using their own tailor-made methodologies. SFDR now imposes new binding regulations. However, portfolio managers having longstanding “ESG” expertise can carry on applying their own interpretation, using their own tools and models to comply with SFDR as long as there is no convergence of ESG methodologies within the European Union. In other words, as of today, SFDR does not prevent asset managers from using their proprietary ESG methods under the condition that these methods can be justified.

On the other side, what remains important and critical for distributors/product manufacturers under MiFID is finding the green investments that best align with their clients’ preferences. This can be done through a combination of all the investment styles set up and led by asset managers. Clear and fair combination means meeting both savings and investment objectives and risk limitations for investors/clients.

How will this work in practice remains an open question. It is first and foremost a technical challenge! Actors need accurate and reliable ESG or climate data sources to calculate KPIs2, PAI3 and classify/list top investments in (fund) portfolios. Even though we have the right and raw data, the variety of ESG methodologies without a universal definition of ESG factors might hinder the comparison of green products. It can be complicated for NCAs4, in their supervision role of sustainability-related disclosures and integration of sustainability risks. Recently, on 31 May 2022, ESMA5 published its Supervisory briefing document to provide guidance to NCAs for the supervision of fund documentation and marketing material. ESMA insisted on their obligations, highlighting its objectives to enhance supervisory convergence across the EU internal market.

Only a technical challenge?

A strong human challenge emerges to make ESG information comprehensible. This is clearly linked to education. Information must today be more practical than theoretical. Communication with ESG investors should remain easy, fluid and focus on investors’ needs. 

Most of us agree on the need to invest by taking a deep and serious account of those ESG factors. However, being pragmatic, it will take time to achieve the European Commission’s objective. One issue is that so-called ‘green’ investments can still be expensive, and people favour green electricity as long as it is cheaper. Moreover, the mind-set of people/investors and companies will continue to evolve because our economy is cyclical and generates changes in people’s behaviours. Education and increasing awareness regarding environmental impacts are the key drivers. The existing ESG scope that consists of taking into consideration environmental, social and governance factors is saturated with terminologies and different types of strategies, creating lots of possible interpretations for both sustainability and ESG factors. ESG data and analytics services will evolve more rapidly depending on the pace of standardisation and harmonisation of ESG disclosures. Accordingly, wait and see how the green financial industry can step up with regard to producing and achieving this ‘’green transparency’’ expected for many years by investors, consumers and financial producers interested in the green economy, the environment, and the preservation of the planet.

This interest is echoed by our political decision-makers and European institutions, who are keen to set environmental indicators to measure the progress made but are not progressing at the same speed in implementing European standardisation regarding the production and supervision of those indicators.

Article published in the Green Finance Supplement distributed with Finance, Der Treasurer & DPN in September 2022.

Jean-Pierre Gomez, Head of Regulatory and Public Affairs, Societe Generale Securities Services Luxembourg

*SFDR: Sustainable Finance Disclosure Regulation
1 ESG: Environmental, Social and Governance.

2 KPIs: Key Performance Indicators

3 PAI: Principle Adverse Impacts

4 NCA : National Competent Authorities

5 ESMA: European Securities and Markets Authority