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The new product governance amendments will require firms to specifically take into account ESG factors throughout their product governance processes. These amendments will affect all firms and products which are in-scope for MIFID II product governance such as banks arranging and underwriting securities, funds (both levered and unlevered) raising capital and investment managers offering structured products. However these amendments will be particularly impactful for firms providing ESG-focused products such as Green, Social and Sustainability bonds/asset-backed securities and funds with a sustainability-based investment strategy (e.g. investing in real estate with a high ESG score). The amendments are expected to result in enhanced ESG disclosure for such products.
On 22 November 2022 the last of the ESG-related changes to the MiFID II1 delegated acts2 came into force in the European Union (EU) with the amendments to the product governance rules to incorporate sustainability considerations (Commission Delegated Directive (EU) 2021/12693 – accessible here). These changes now require MiFID II firms to consider sustainability preferences and consider and disclose sustainability factors in product approval and governance arrangements. The changes apply to both manufacturers and distributors throughout the product lifecycle.
The product governance amendments follow companion ESG-related amendments to the MiFID II suitability assessment provisions (Commission Delegated Regulation (EU) 2021/12534 – accessible here), which came into force on 2 August 2022. The amendments to the suitability assessment provisions require firms to integrate consideration of sustainability risks and factors when conducting suitability assessments for clients.
On 23 September 2022, ESMA published revised guidelines on aspects of the MiFID II suitability requirements to deal with the ESG-related changes.
On 8 July 2022, ESMA issued a consultation for review of, and with proposed ESG-related updates to, its existing guidelines on MiFID II product governance. The consultation period ended on 7 October 2022, and final guidelines are expected from ESMA in Q1 2023.
Product governance and ESG: What do manufacturers and distributors need to do?
Manufacturers and distributors must now consider “sustainability factors”5 (i) in their product approval process for each financial instrument and (ii) in the other product governance and oversight arrangements for each financial instrument that is intended to be distributed to clients seeking financial instruments with a sustainability-related profile.
Manufacturers need to do the following:
Distributors need to do the following:
The MiFID II ESG amendments are useful regulatory developments as the EU seeks to action its Sustainable Finance Action Plan. They put the requirement to consider “sustainability” front and centre for financial products. However the practical impact of these amendments remains to be seen.
This update was authored by Richard Pugh, Aparna Sehgal and Ellen Sachs.