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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 managers, new 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).
- MiFIR, works alongside the directive, extends the codes of conduct for financial assets, and sets new disclosure rules for trading activities, regulators, and supervisors.
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.
- 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 have seen, 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.