ESG addition to Mifid II: what new rules mean for financial firms

As implementation approaches for the EU’s latest directive on integrating sustainability factors into governance, we analyse the implications for financial institutions.EU regulators are continuing t


As implementation approaches for the EU’s latest directive on integrating sustainability factors into governance, we analyse the implications for financial institutions.

EU regulators are continuing their mission to create a more responsible investment environment and stamp out unjustified claims around sustainability, known as greenwashing.

The latest attempt is an amendment to the Revised Markets in Financial Instruments Directive (Mifid II). This amendment, coming into force on 22 November 2022, builds on existing rules requiring advisers to ask about and respond to investor preferences on sustainability. The new, additional requirement is for investment firms to take sustainability risks into account.

Sustainability risks could materially impact an investment’s value. So, it will now be mandatory for all investment advisers and portfolio managers - retail and institutional - to capture information about investors’ sustainability preferences.

Where a client has such preferences, firms must comply with them when conducting transactions or recommending products.

And additionally, during the product approval process, they should also consider sustainability factors for financial instruments, and present them transparently.

What it means for financial institutions

Firms must ensure the products they offer or recommend do what they set out to do from an ESG perspective. They should include “any sustainability-related objectives” when identifying the potential target market for a product, and set these in detail.

Firms targeting clients with any form of ESG preference must specifically cover ESG in the product approval process, product governance, and oversight arrangements.

Firms must also review products periodically and consider whether they remain consistent with the needs and goals of target markets, including sustainability-related ones.

Meanwhile, issuers and distributors must consider their obligations under ESG, and review the exchange of information to ensure firms meet their ESG considerations.

How much will it cost to implement?

We expect the costs of implementing and integrating ESG factors could be low where firms choose to leverage external service providers who have the infrastructure and expertise already in place to advise and deliver on ESG requirements.

Firms should instead invest more systematically in ESG expertise, such as training, or buying relevant data from third-party vendors. They should also document organisational structures, allocate functions and responsibilities, and specify reporting lines.

Integrating ESG into your business - how Delta Capita can help

At Delta Capita, we are committed to driving outstanding outcomes for all our stakeholders and we aspire to be best-in-class on ESG integration services.

We constantly evolve our offering to align to the latest industry and regulatory developments.

Delta Capita’s Structured Products practice has already evolved the inSPire Due Diligence utility service to support manufacturers and distributors in the capture and exchange of the ESG data points for each Distributor Due Diligence Questionnaire and annual refresh. We also provide product and distributor governance consultancy to support implementation and integration of ESG into your structured products business.

Outside of Structured Products, Delta Capita offers ESG Consulting and Technology Services that provide insight, capacity and expertise to meet global sustainability objectives. DC can assist with business strategy and transformation, process implementation and improvement, as well as monitoring and reporting ESG metrics in line with regulatory demands.

To find out more about Delta Capita’s Structured Products offerings or Sustainable Finance Consulting Services, contact us today.

By Oliver Perry, Head of Due Diligence and Hugo Lai, Due Diligence Analyst.