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Article | FI Observer

MiFID II and ESG – it’s not just European

Financial, Executive and Professional Risks (FINEX)

By Claire Nightingale | October 12, 2020

How will European legislation influence asset managers globally? Will firms be sufficiently prepared?

As we continue to explore the impact of environmental, social and governance (“ESG”) initiatives on global financial institutions, we consider below how European legislation will influence asset managers globally, and whether firms are sufficiently prepared.

The Markets in Financial Instruments Directive (2014/65/EU) (“MiFID”) is a European regulation that standardises the disclosure requirements by firms operating in the European Union (“EU”) and is aimed to increase transparency across the EU’s financial markets.

The European Commission is seeking to develop an EU framework which puts ESG at the centre of the EU’s financial system. In so doing, it has published draft delegated legislation (the “MiFID ESG Regulation”)1 which amends the existing “MiFID Organisational Regulation” which itself sets out organizational requirements and operational conditions for investment firms subject to MiFID.

The MiFID ESG Regulation impacts:

  • EU incorporated investment firms that are authorised to perform MiFID-regulated services such as providing portfolio management or investment advice (or both);
  • Alternative Investment Fund Managers with a top-up permission enabling them to perform the MiFID-regulated services of individual portfolio management or the provision of investment advice;
  • any MiFID-authorised entity within the asset manager's group.

Note however that this is not a solely European issue and asset managers located outside the EU may also be impacted. For example:

  • If a U.S. asset manager appoints a MiFID-authorised EU sub-investment manager to render certain services (for example portfolio management services), the MiFID-authorised sub-investment manager will need to comply with the provisions of the MiFID ESG Regulation, if ESG considerations are relevant.
  • If a U.S. asset manager is appointed as a sub-manager to a MiFID-authorised firm, then although not directly subject to MiFID, the U.S. asset manager will need to provide the MiFID-authorised asset manager with information related to ESG disclosures so that the MiFID-authorised asset manager is able to comply with its obligations under the MiFID ESG Regulation.

How then might asset managers see their practices differ if and when the MiFID ESG Regulation is in force

Suitability now

Under the existing structure, firms providing investment advice and portfolio management are required to obtain the necessary information about the client's knowledge and experience in the investment field, their ability to bear losses, and objectives including the client's risk tolerance. This is designed to enable the firm to provide services and products that are suitable for the client (the so called “suitability assessment”). Currently the information regarding the investment objectives of the client includes such information as the length of time for which the client wishes to hold the investment, their preferences regarding risk taking, risk profile, and the purposes of the investment.

Suitability under the new regulation: mandatory ESG assessments

The proposals set out in the MiFID ESG Regulation aim to clarify that ESG considerations and preferences should be taken into account in the investment and advisory process as part of the firm’s obligations to its clients.

The MiFID ESG Regulation provides that:

  • investment firms providing financial advice and portfolio management should carry out a mandatory assessment of their clients’ “ESG preferences”;
  • investment firms must report to retail clients explaining how any recommendation meets their investment objectives, risk profile, capacity for loss bearing, and whether the client's investment objectives are achieved by taking into account their expressed ESG preferences.

The sorts of questions which may be asked are:

  • How important is it to you to invest in companies which takes ESG factors into account?
  • Are there particular sectors or industries you would wish to avoid?
  • How strongly do you feel about social issues such as diversity, equal opportunities and working conditions?

Once finalised and adopted by the European Commission, the MiFID ESG Regulation will enter into force 20 days after publication in the EU’s Official Journal. Adoption is not anticipated until 2021, and the MiFID ESG Regulation states that it shall apply 12 months after the date of entry into force. Whilst there appears to be time for asset managers to consider how best to address these rules, evidence suggest that they need to do more now to prepare. A survey commissioned by Rathbones says:

“While this study provides a groundswell of evidence that advisers believe root and-branch ESG integration is the imminent future, it also shows many advisers do not appear to be ready for this, whether MiFID II’s direction becomes mandatory or not. As you’d expect, ESG advisers are better prepared.” 2

It is critical for asset managers to proactively identify and record an investor’s ESG preferences. Further, asset managers must identify both appropriate investments and investing limitations which accord with investor expectations. Failure to do so may increase the risk of claims alleging breach of investment suitability requirements.

It is recommended that asset managers talk to their brokers and understand the breadth, scope and limitations of coverage afforded under their Management & Professional Liability policies. At Willis Towers Watson, we can assist asset managers in preparing for the annual renewal of these insurance policies, and help navigate through the questions that are expected from insurers, including the extent to which the MiFID ESG may impact the business and what steps are being taken to comply with the regulation.


1 Commission Delegated Regulation (EU) 2017/565


Claire Nightingale
Global Head of FINEX Financial Institutions Claims Advocacy & TPL


Alexandra Kindbom
Canada Head of FINEX Financial Institutions

Susan Finbow
Global Head of Financial Institutions

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