Investment firms – Are you ready for the MiFID sustainability deadlines?

Investment firms will be informed of the upcoming deadlines of 2 August 2022 for the integration of sustainability factors, risks and preferences into organizational requirements and of 22 November 2022 for the integration of sustainability factors into governance obligations some products (“MiFID Sustainability Requirements”). UCITS and AIFM management companies with MiFID ‘additoinal’ permissions will also be subject to MiFID durability requirements.

In this briefing, we take a closer look at the MiFID sustainability requirements and outline practical steps investment firms can take now to prepare for compliance.

Organizational requirements and operating conditions

Commission Delegated Regulation (EU) 2021/1253 (here) amends the MiFID Delegated Regulation1 require investment firms that provide investment advice and portfolio management services to integrate sustainability factors, risks and preferences into organizational requirements and operating conditions.

The delegated regulation applies from August 2, 2022 and includes requirements for:

  • consider sustainability risks when meeting organizational requirements, including those related to decision-making procedures, internal control mechanisms and the employment of qualified personnel;
  • establish, implement and maintain adequate risk management policies and procedures that take into account sustainability risks;
  • consider a client’s sustainability preferences when identifying conflicts of interest that arise in connection with the provision of investment and ancillary services;
  • provide, where applicable, the sustainability factors considered in the product selection process when providing investment advice; and
  • integrate sustainability preferences into suitability assessments and suitability reports. ESMA has produced a draft Guidelines with more details on how investment firms should achieve this. “Sustainability Preferences” are classified by reference to the SFDR2 and the taxonomic regulation3. The draft guidelines place particular emphasis on the importance of explaining these concepts clearly, avoiding technical language and explaining what the environmental, social and governance aspects mean for clients.

Product governance requirements

Commission Delegated Directive (EU) 2021/1269 (here) amends the MiFID II delegated directive4 and requires investment firms that manufacture and distribute financial instruments (in the scope of investment firms) to integrate sustainability factors into their product governance obligations.

The delegated directive is due to be brought into Irish law by 21 August 2022 with an application date of 22 November 2022. As part of the scope, investment firms will be required to consider the factors sustainability in the approval process for each product and in other governance and oversight arrangements. for products intended for distribution to customers seeking products with a sustainability profile. New requirements include:

  • specify as part of the target market assessment any sustainability-related objectives with which the product is compatible;
  • avoid general statements that products have a sustainability-related profile, instead investment firms should specify to which group of clients with sustainability-related objectives the product is intended to be distributed;
  • where applicable, present product sustainability factors in a transparent manner and provide distributors with relevant information to take into account the customer’s sustainability objectives; and
  • regularly review products and assess whether the product or service remains consistent with the needs, characteristics and objectives, including any sustainability-related objectives, of the identified target market and whether the planned distribution strategy remains appropriate.

On July 8, 2022, ESMA issued a consultation on the draft guidance on governance requirements for MiFID II products, which includes proposals on how investment firms can specify the sustainability-related objectives with which a product is compatible. This consultation closes on October 7, 2022 and ESMA expects to publish a final report in the first quarter of 2023.

What practical steps can investment firms take now?

When preparing to comply with the sustainability requirements of MiFID, investment firms should bear in mind the content of the Central Bank of Ireland (the “CBI”) “Dear CEO” November 2021 letter (detailed in more detail in our briefing here). In the letter, the CBI said it expects corporate boards and senior management to be proactive in taking steps to promote a culture that emphasizes climate and ESG issues. wider.

Practical steps investment firms can take now to facilitate compliance with MiFID sustainability requirements are:

  • ensure that sustainability is documented at all levels of the organization, i.e. in board/committee agendas and in policies and procedures;
  • obtain underlying product information to facilitate compliance;
  • review and update questionnaires, templates and IT systems used for client suitability assessments; and
  • implement appropriate training for board members and staff.