Simone Gallo: “In short, advisers will have to modify their assessment of client preferences in relation to ESG and should ensure the suitability of financial products and services from a sustainability perspective are considered.”
Up until now, ESG investing has been a voluntary affair. But as a swathe of regulation approaches, it’s time for advisers to get clued up, writes Simone Gallo
It doesn’t seem long since advisers were getting their house in order to comply with MiFID II suitability requirements, with final guidelines only issued in May 2018. Yet already amendments are afoot. This time in relation to sustainability assessments.
The changes come via the European Commission, which made a formal request of the European Securities and Markets Authority (ESMA), as part of its Sustainable Finance Plan. This is the investment pillar of a broader vision to transform Europe into the first continent with zero environmental impact between now and 2050 (also known as the European Green Deal).
A significant portion of the new European regulation will deal with disclosure requirements and mainly impacts managers and distributors of financial products. But the European Commission has also submitted Delegated Acts to amend MiFID II, which will encompass financial advisers under updated suitability requirements.
In short, advisers will have to modify their assessment of client preferences in relation to ESG and should ensure the suitability of financial products and services from a sustainability perspective are considered.
If the proposal becomes regulated, as expected, the client assessments required could be complex. Particularly since most advisers do not have the structured tools and processes in place to analyse the suitability of sustainability factors on financial products offered to clients: from single stocks to bonds, from mutual funds to structured products.
Modified suitability assessments
The required assessment will likely change the process and conversation with clients at various points. For example:
- During discussion of the client’s investment objectives (sustainability preferences should be included, whether they are interested or not);
- When a financial instrument is recommended, the information provided should include a description of the sustainability considerations;
- Before a specific transaction, make sure that the client’s investment objectives also include the customer’s sustainability preferences;
- MiFID must have policies and procedures in place to ensure the appropriate supply of ESG and sustainable products to its customers;
- When providing investment advice, a report must be submitted on the client’s investment objectives to assess whether they are achieved by also considering the sustainability preferences expressed.
Only the few players able to provide a full journey for the clients will be able to differentiate themselves and increase the ESG assets across their clients’ portfolios while being compliant with the regulation.
The journey will include the initial suitability assessment, the adequate offer and selection across ESG and sustainable products and finally, clear and understandable reporting and analysis to make sure all client choices and preferences have been met.
Our perception is, in pursuit of the Sustainable Finance Plan, no stone will be left unturned by regulators.
For this reason, it will be crucial for advisers to establish strategic partnerships with ESG specialists to keep up with amendments as they happen and ultimately provide investors with the sustainability standards expected.
Simone Gallo is managing director MainStreet Partners