The latest amendments to the European Union's MiFID II regulations came into effect today (2 August), but the lack of clarity and consistent labelling on sustainable assets means many fund groups are still not ready for the change, experts told International Investment's sister brand Investment Week.
MiFID II is a legislative framework brought in by the bloc to standardise practices across the EU and increase transparency for investors, especially around costs.
As of today (2 August), the amended regulations will require financial advisers to consider clients' sustainability preferences when conducting suitability assessments. If clients express an interest in making sustainable investments advisers will have to accommodate.
Fund managers will also be required to provide ESG data in a standardised format for all products marketed in the EU to fund distribution channels so that the distributors can evaluate the end client sustainability preferences.
Financial advisers will struggle to meet MiFID II sustainability obligations due to patchy data
Kifaya Belkaaloul, head of regulatory at NeoXam, said: "This is an important change. ESG data is not only a vital part of the investment process, but also essential in adding weight to sustainability claims. The challenge this presents is that it requires firms to pull ESG data from multiple disparate sources, efficiently into a new format.
"Ultimately, the firms who have a solid data architecture in place are those whose reporting houses will stand solid against the winds of regulatory change."
Indeed, exactly how firms go about presenting this data is still unclear, even when the deadline has arrived.
Research from FE fundinfo last week found that more than half of fund groups were yet to submit data ahead of the deadline.
Benjamin Maconick, managing associate in Linklaters' financial regulation team, noted that firms have not had that long to understand these requirements, since the ESMA guidelines were only published in draft form back in January, with the final format still not expected until Q3 this year.
"There remains some uncertainty over the correct approach to the MiFID II amendments, and firms only had about six months to digest and implement the recommendations of the draft guidelines," he said.
Commenting on the changes coming into force today, Maconick said that the key point was the aforementioned concept of ‘sustainability preferences'.
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Simone Gallo, managing director of MainStreet Partners, said this could be broken down into three parts, all of which he said are still a "work in progress".
The first requirement is having a minimum share invested in eco-sustainable investments linked to taxonomy, but Gallo noted very few companies currently release that type of data, so most of the products do not have a minimum declared, even with an obvious environmental profile.
A minimum share invested in sustainable investments is the second factor but what constitutes a sustainable investment is yet to be fully defined, Gallo added
"We have already seen from the first releases of the EETs (European ESG Templates) that asset managers give very different percentages depending on their methodologies and this approach does not match the product classification of the SFDR."
The final requirement is for a product to consider the ‘Principal Adverse Impact'.
Gallo explained: "At the moment, you will only have a yes or no answer so no detailed information on the various metrics which will be available in 2023.
"For these reasons we believe it is still fundamental and necessary to follow a holistic and all-encompassing approach to the evaluation of the degree of sustainability of a product and not simply focus on one of the above figures.
"The challenge for all fund distributors and advisors will be to match and assess their current range of products with the clients' preferences in order to avoid accusations of promoting greenwashing products and at the same time be compliant with the regulation," Gallo added.
The overall lack of consistency on labelling sustainable assets continues to be an ongoing challenge, according to Danny Cox, head of external relations at Hargreaves Lansdown. He recognised that some fund groups had started to provide the necessary information.
Cox told Investment Week: "Should HL's advisory clients express an interest in investing into sustainable assets through the advisory, there are options available to them."
