Eurosif sends a letter to ESMA on MiFID II sustainability preferences

28 April 2022

Alongside the Eurosif's response to the ESMA public consultation, Eurosif has attached a letter to highlight the need to place the specific provisions on sustainability preferences into the broader context of the EU Sustainable Finance agenda and ongoing market developments.

Sustainability preferences fully integrated with suitability assessment

Eurosif believes sustainability preferences should be fully integrated with the financial suitability assessment to make one coherent advisory process focusing on determining the financial instruments that match both a client financial profile as well as sustainability objectives, if any. [...] Therefore, it is of paramount importance that these rules operate effectively and achieve the stated policy objectives of rendering sustainability focused investment products more available to end-investors while mitigating risks of greenwashing or financial misselling. [...] Clients should be asked in broad, non-technical terms about their sustainability preferences or objectives, which then allows the advisor to identify which of the criteria are the most relevant in matching these preferences. This will then allow the advisor to identify from the group of suitable financial products the ones that have the best results on the identified criteria.

Significant risks associated with combining complex criteria with self-assessment

For many retail investors the criteria in which they must articulate their sustainability preferences will prove complex. Consumer testing exercises done in the context of the SFDR pre-contractual and periodic reporting templates demonstrated the complexity of translating technical jargon from the EU Sustainable Finance agenda.[...] Our proposal would ensure that the client express sustainability objectives and preferences that are then matched by the advisor with the relevant criteria. Benchmarking the suitable financial products against these criteria will allow the advisor to recommend products that are both suitable and match the client’s sustainability preferences.

Even in a fully integrated suitability assessment, data accuracy and comparability across MiFID criteria may remain elusive

Comparability will be an issue across all the MiFID criteria for the foreseeable future. To mitigate this, further guidance on the methodologies to calculate PAIs and Taxonomy alignment and eligibility will be necessary. For the share of sustainable investments, legislative changes may be necessary to refine further the definition in Article 2(17) SFDR. However, we must consider the possibility that data comparability may remain elusive, particularly as there may be a divergence in data availability between the European investable universe of companies subject to CSRD and the non-EU investable universe. Therefore, in the long run there may be a case for an alternative approach based on a stronger and more robust classification of financial products, for example through a system of European-wide labels. A set of labels for retail investment products focused on either investment processes or outcomes, or a combination thereof, may be a more realistic and pragmatic way of matching sustainability preferences of retail investors with financial products.