New forms under the WpHG are due starting August 2022
In a move towards more sustainable investment practices, investment advisors and asset managers in the European Union are now required to take clients' sustainability preferences into account when providing investment advice and managing portfolios. This change, outlined in the Delegated Regulation (EU) 2017/565, supplementing MiFID II Directive 2014/65/EU, comes into effect on August 2, 2022.
Under the new regulations, firms are obligated to collect information about clients' sustainability preferences as part of the suitability assessment. Advisors must explicitly ask clients whether they have preferences related to Environmental, Social, and Governance (ESG) characteristics or sustainable investments and incorporate these preferences into their advice or portfolio construction process.
The integration of sustainability preferences into the investment process is a crucial aspect of the new regulations. Clients' preferences need to be taken into account when assessing which financial instruments are suitable, ensuring that investment products recommended or selected align with stated ESG preferences.
Firms must also have policies and procedures in place to identify, prevent, and manage conflicts of interest linked to the integration of sustainability preferences. For example, ensuring that marketing or product incentives do not bias the advice away from the client's ESG goals.
Transparency and proper documentation are also key components of the new regulations. Firms must properly document clients' ESG preferences and how these have been incorporated into the investment decision processes, ensuring traceability and compliance with regulatory requirements.
These obligations have been clarified and enhanced in amendments to Delegated Regulation 2017/565, including those aiming to specify how conflicts of interest should be handled and how sustainability preferences should be incorporated in an operational manner in investment firms under MiFID II frameworks.
These MiFID II and Delegated Regulation rules work alongside related EU sustainable finance legislation such as the Sustainable Finance Disclosure Regulation (SFDR), which requires disclosures on sustainability policies and risk integration, supporting transparency for end-investors on ESG factors.
In sum, investment advisors and asset managers must actively collect and document clients' sustainability preferences as part of the investment suitability process, integrate those preferences into recommendations and portfolio management, implement organizational policies preventing conflicts of interest arising from ESG integration, and maintain transparency and proper reporting in line with MiFID II Delegated Regulation 2017/565 and SFDR. This framework ensures client sustainability preferences are a core part of investment decisions and that firms are accountable for managing any related conflicts or risks in their organizational structure and operating procedures.
It's worth noting that the implementation period for these sustainability requirements was shorter than originally expected, and new WpHG forms must be designed and implemented for customer onboarding to collect sustainability preferences. The specific financial instruments that a client's sustainability preference applies to are not specified in the text, but financial instruments where the most significant adverse sustainability impacts are considered are typically products under Articles 8 and 9 of the Disclosure Regulation.
The processes for determining conflicts of interest must be adjusted to accommodate the client's sustainability preferences, and ESG criteria agreement with the client is limited due to the nature of sustainability preferences. The possible sustainability preferences of the client must be considered in the conflicts of interest determination process, and a conflict of interest is defined as opposing interests in relation to the client's sustainability preferences.
In the advisory protocol for investment advice, the implementation of the client's sustainability requirements must be explained, and the agreement on ESG criteria is limited due to the nature of sustainability preferences. Sustainability preferences are usually tied to the Taxonomy Regulation and its rules, and financial instruments with a minimum share of sustainable investments in accordance with the social and governance objectives under Article 2(17) of the Disclosure Regulation are being considered.
These new regulations mark a significant step towards more sustainable investment practices in the EU, ensuring that clients' sustainability preferences are a core part of investment decisions and that firms are accountable for managing any related conflicts or risks in their organizational structure and operating procedures.
- The sustainability preference integration in the investment process, as outlined in Delegated Regulation (EU) 2017/565, involves firms considering environmental-science factors while investing, especially with regards to financial instruments under Articles 8 and 9 of the Disclosure Regulation.
- Science plays a crucial role in environmental-science, which is a key consideration in the sustainability preferences, as investment advisors and asset managers are obligated to incorporate these preferences when providing investment advice and managing portfolios.
- The sustainability preferences of clients can influence both investment decisions and business strategies, as firms are required to adjust their financial practices to align with these preferences and ensure accountability, as stipulated by the Delegated Regulation (EU) 2017/565 and the Sustainable Finance Disclosure Regulation (SFDR).
