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MiFID II/MiFIR: Incorporating Sustainability Preferences in Financial Advice

From 2nd August 2022, under the amended directive MiFID II, investment managers must align and disclose financial instruments’ “sustainability factors” with their client’s sustainability preferences. This article will discuss what this new ESG reporting requirement means for investment managers.

MiFID II/MiFIR: Incorporating Sustainability Preferences in Financial Advice

New crises are triggering major economic shocks in our economy, which result in new     regulations. While leaders had taken a neoliberal approach to economics, the 2008 financial crisis   highlighted new economic risks, investor risks, and unfair competition. Therefore, to offset the negative consequences   of the crisis, governments created new rules to increase transparency, protect investors, and reduce     risks. 
 

In   the EU, the European Commission reviewed the Markets in Financial Instruments Directive (MiFID) which applies   to investment managersnew trading platforms, and new     economic activities. It published MiFID II and MiFIR to integrate the fragmented capital markets and   strengthen investor protection.

Today, we are confronting the covid and climate crises. Consequently, the Commission had to review its rules again   through a MiFID II ‘quick fix’ and a review of MiFID II/MiFIR. The   latest MiFID II amendment aims to foster sustainable and inclusive European growth   by redirecting capital towards sustainable economic activities, by   requiring asset managers to assess their client’s sustainability preferences and to align them   with the financial instrument’s sustainability. 

This article will discuss MiFID/MiFIR, the new sustainability preferences, and Greenomy’s role in helping investors   navigate the reporting challenge.

An Overview of the MiFID and MiFIR Timeline

MiFID   provides investors with a framework to offset investment risks and address the neoliberal   approach to the financial market prior to the 2008 financial crisis. 

MiFID II and MiFIR (Markets in Financial Instruments Regulation) were adopted post financial crisis and have     been applicable since 2018. 

     
  • MiFID was amended to MiFID II, which expanded the product scope, by including other     financial products, such as over the counter (OTC) derivatives and held different objectives in mind (you can find     them on the European         Commission’s website).
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  • MiFIR, works alongside the directive, extends the codes of conduct for financial assets, and sets     new disclosure rules for trading activities, regulators, and supervisors.
     
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The recent Von der Leyen Commission reviewed both pieces of legislation again. Under MiFID II, they introduced   a new sustainability reporting requirement for clients’ of investment managers to align the   client’s and financial instrument’s environmental objectives. Under MiFIR, referred to as the “MiFIR     review”, they introduced a new reform to the European trading infrastructure, requiring new disclosures   and defining sustainability preferences, to limit the integration of available financial   products to a client’s portfolio, unless it matches the client’s sustainability preferences.

MiFID II and MiFIR Sustainability Preferences

By incorporating sustainability, the European Commission has harmonised new definitions for   financial participants and given investors across Europe the same disclosure, protection, and   now sustainability guidance for financial instruments.

The review brings new challenges for regulators and participants of the financial market. 

     
  • The new rules on sustainability preferences will impact financial participants in the scope of MiFID, because they     will need to disclose a new set of data to comply with the new requirements.
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  • Participants will need to coordinate the legal complexity that the misalignment       of timelines for the application of integrating sustainability under the SFDR and MiFIR rules creates.  

The European Commission will continue developing legislation and reporting rules, as new crises and risks arise. The   MiFIR II and MiFID III final texts are expected to be published next year. 

 

ESG Reporting Requirements are Rising Everywhere

The EU is taking important steps to improve data disclosure and harmonisation in the financial sector. As we haveseen, regulations and directives are being amended, and new templates are published, such as the European ESG Template (more in our EET blog) by the Financial Data Exchange Templates (FinDatEx),   or the European MiFID Template (EMT), to facilitate the exchange of market data from fund groups   to distributors.

EU legislation is applicable abroad, so companies should not see the new reporting requirements as a threat, but as   an opportunity to position themselves in the new sustainable future that is being built.

The Principles for Responsible Investing (PRI) published a Review of trends in ESG reporting requirements for investors, which found that over 90% of ESG   reporting requirements require public disclosure or disclosure to the investors of a financial product, and attributes   this to the increased concern of greenwashing or ESG-washing. Sustainability is becoming embedded in different   financial structures, so the companies’ integrating ESG data into the systems, disclosing data as per the reporting   deadlines, and integrating sustainability into the company’s story will be ahead in the future in dealing with the   climate crisis.

How Greenomy can Help

The new ESG disclosure requirements can be challenging and keeping up with the upcoming Sustainable Finance   regulations is a hurdle for financial market participants. To tackle this, at Greenomy we digitalise these requirements into different portals so that we can support you, as an asset   manager, investment manager, company, or financial institution, along your ESG data journey.

 If you would like to discuss how to tackle your own reporting requirements, you can book a free consultation here.

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