View more on these topics

Rules on mandatory ESG integration proposed for advice

The European Commission has published draft rules on how to incorporate environmental, social and governance preferences into investment advice.

The proposed regulations seeks to make integration of clients’ ESG preferences mandatory for those providing investment advice.

The European Commission first revealed its intention to make it mandatory to inquire about the clients ESG preferences in March 2018 with its Action Plan on Financing Sustainable Finance.

It proposes to do so by amending  MiFID II and the Insurance Distribution Directive to ensure sustainability preferences are taken into account in the suitability assessment.

Current MiFID rules on suitability require financial professionals to obtain information about client’s  knowledge about investments and assess their risk profile in order to recommend products suitable to the client. Non-financial objectives are left out, however.

The European Commission has found that the existing suitability assessments usually do not include ESG issues, and the majority of clients did not raise these issues themselves. This means the firms do not consistently factor in ESG issues in their process.

The proposed changes aim to unify integration of ESG considerations into the investment and advisory process “in a consistent manner across sectors.” The requirements to integrate ESG into their internal processes and to inform their clients about it would apply to asset managers, insurance companies, pension funds, or financial advisers, providing investment advice.

Apart from amending suitability rules, the draft also proposes new categories of low carbon and positive carbon impact benchmarks.

The proposals are part of EU’s efforts to align European policy framework and investing with the UN’s 2030 Sustainable Development Goals.

In January 2018, the European Commission’s EU High-Level Group on Sustainable Finance recommended agreeing a taxonomy on sustainable finance at the EU level. That agreement must be reached in order for the draft rules on ESG to be adopted.

The rules will then enter in to force after being published in the Official Journal of the European Union and only if they do not come up against objections from the European Parliament or European Council.

Changes to legislation

  • The European Commission states the goal of the legislation:

“To enable investment firms that provide investment advice and portfolio management to recommend suitable products to their clients, those investment firms should introduce in their suitability assessment questions that help identify the client’s individual ESG preferences.

“In accordance with their obligation to act in the best interests of the client, recommendations to clients should reflect both the financial objectives and, where relevant, the ESG preferences expressed by those clients.”

  • It proposes introducing a definition of ESG preferences:

“ESG preferences’ means a client’s or potential client’s choice as to whether and which environmentally sustainable investments, social investments or good governance investments should be integrated into his or her investment strategy.”

  • The European Commission also proposes firms should be able to demonstrate how they include ESG when assessing suitability:

“Investment firms shall have in place, and be able to demonstrate, that they have in place adequate policies and procedures to ensure that they understand the nature, features, including costs, risks of investment services, and financial instruments selected for their clients, including ESG considerations where relevant, and that they shall assess, while taking into account cost and complexity, whether equivalent investment services or financial instruments can meet their client’s profile.”


Tapering of annual allowance – adjusted and threshold income

The definitions of adjusted income and threshold income used to determine whether, and to what extent, someone’s annual allowance will be reduced can be confusing.  Here we try to make sense of it all. The annual allowance will be reduced for high income individuals from 6 April 2016.  Our previous article Tapering of annual allowance […]

How do you choose the best online service?

By Ross Jackson, senior marketing manager There are many different protection online services available in the market and no doubt you’ll have used a few when submitting protection business. But why should you have to put up with slow, unresponsive sites for your business when you’re used to dealing with slick, modern user experiences in your […]


News and expert analysis straight to your inbox

Sign up


    Leave a comment


    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm