Overview of the ESG driven amendments to MiFID

May 06, 2020

What is the law / regulation?

Following a consultation that ran between May and June 2018, the European Commission published a draft delegated regulation in January 2019 (the “ESG Regulation”).1 The ESG Regulation amends the existing “MiFID Organisational Regulation” (the “MiFID Org Reg”)2 which sets out organizational requirements and operational conditions for investment firms subject to the Markets in Financial Instruments Directive (2014/65/EU) (“MiFID”).

The proposed ESG Regulation is part of the European Commission's broader initiative on sustainable development, which aims to develop an EU framework which puts environmental, social and governance ("ESG") considerations at the heart of the EU’s financial system.

Under the existing MiFID Org Reg framework, 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 to enable the firm to provide services and products that are suitable for the client (suitability assessment). The information regarding the investment objectives of the client includes information on the length of time for which the client wishes to hold the investment, his/her preferences regarding risk taking, risk profile, and the purposes of the investment. However, the information about investment objectives generally relates to financial objectives, while non-financial objectives of the client, such as ESG preferences, are usually not addressed. The proposals set out in the 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 duties towards clients.

Article 1 of the ESG Regulation aims at clarifying that investment firms providing financial advice and portfolio management should carry out a mandatory assessment of their clients’ “ESG preferences”3 in a questionnaire addressed to them.

The ESG Regulation also seeks to improve the information regarding the ESG factors of financial products that is given to clients before the provision of investment advice and portfolio management services.

Finally, Article 1 requires investment firms to prepare a report to retail clients that explains 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.

What is its scope and impact?

The ESG Regulation impacts EU incorporated investment firms that are authorized to perform MiFID-regulated services such as providing portfolio management or investment advice (or both). It is important to note that the requirements set out in the ESG Regulation will only apply where ESG considerations are relevant to the provision of investment services to clients.

Portfolio managers

When providing prior information to the client or potential client regarding the types of financial instrument that may be included in the client portfolio, the portfolio manager must now take into account the client’s ESG preferences, if any, in addition to the client's investment objectives and the types of transaction that may be carried out in financial instruments, including any limits.

Portfolio managers and investment advisers

Portfolio managers and investment advisers, when providing prior disclosure to clients or potential clients regarding the nature and risks of financial instruments, must now take into account any “ESG considerations”.4 

Investment advisers

When giving information to a client on the factors used by the investment adviser to recommend financial instruments, the investment adviser must now take into account ESG considerations, where relevant.

Further, the suitability report that an investment adviser is currently obliged to give to a retail client setting out how the advice provided is suitable for the retail client must take into account this client’s ESG preferences.

What is the timeline?

Once finalized and adopted by the European Commission, the ESG Regulation will enter into force 20 days after publication in the EU’s Official Journal. Adoption is not anticipated until 2021, and the ESG Regulation states that it shall apply 12 months after the date of entry into force.

What are the Key Considerations for Asset Managers?

AIFMs with a top-up permission enabling them to perform the MiFID-regulated services of individual portfolio management or the provision of investment advice would be required to apply the ESG Regulation. In addition, any MiFID-authorised entity within the asset manager's group will need to comply with the revised framework established by the ESG Regulation.

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

Moreover, the requirement to obtain and then consider clients’ ESG preferences sets a new precedent. While it would not apply to non-EU clients, this concept could become part of the global discussion about ESG standards and influence clients and regulators outside of the EU.


1) Click here

2) Commission Delegated Regulation (EU) 2017/565

3) "ESG preferences” here means “a client’s or potential client’s preferences for environmentally sustainable investments, social investments or good governance investments”.

4) Per Article 1(1) of the ESG Regulation:
"ESG considerations” means a consideration related to “environmentally sustainable investments”, “social investments” or “good governance investments”. “Environmentally sustainable investment” means an investment in an economic activity that contributes to an environmental objective, and in particular an environmentally sustainable investment as defined in Article 2 of the Taxonomy Regulation.
"Social investment” means an investment in an economic activity that contributes substantially to a social objective, and in particular an investment that contributes to tackling inequality, an investment fostering social cohesion, social integration and labour relations, and an investment in human capital or economically or socially disadvantaged communities.
Good governance investment” means an investment in companies following good governance practices, and in particular companies with sound management structures, employee relations, remuneration of relevant staff and tax compliance. 

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