Assessment of ESG preferences and advice suitability – time to prepare for MIFIDII?

Climate change, good governance and more generally responsible investing are bringing European regulatory agendas into high gear.

In order to promote ESG investing (Environment, Social, good Governance) and fight against greenwashing, the European Commission has developed a detailed sustainable finance action plan.

This article gives an overview of the main elements of this new regulation.


A green taxonomy to identify business activities that are sustainable has already been published in 2021. It is divided into 6 main categories:

  • Climate change mitigation
  • Adaptation to climate change
  • Protection and restoration of biodiversity and ecosystems
  • Pollution prevention and control
  • Transition to the circular economy (waste prevention and increased use of secondary raw materials)
  • Sustainable use and protection of water and marine resources

The same work will soon be done on the social component in the coming years. By establishing precise criteria for classifying ESG products, this new regulation aims to provide investors with greater transparency, so that they can invest more easily and with full knowledge of the facts in ESG products.

The three nuances of green

Most financial products will be categorized based on their ESG impacts, ESG factors and ESG risks in three categories:

  • Article 6 (undefined impact)
  • Article 8 (positive impacts on certain domains without excluding negative impacts on others)
  • Article 9 (positive impacts on certain domains with no negative impacts on the EU green taxonomy activities).

Assessment of client’s ESG preferences

This new regulation also affects the MiFIDII regulation by requiring to add the assessment of ESG preferences into the client suitability process and investment decision making. This new requirement should come into force in 2022 for all financial advisors. This will be compulsory mainly in case of portfolio management or advisory.

What does ESG meaning?

Environmental, Social And Corporate Governance (ESG) is an evaluation of an organization’s shared conscientiousness for social and environmental factors.


Environment standards can entail energy use, waste pollution, conservation of resources and the treatment of animal products. The criteria could also be used to evaluate potential environmental risks.


Social criteria assess the firm’s relationship in business relations with clients. Is It working if the suppliers are in line with a standard of value? Does the company offer volunteering? Does the company regard employees’ protection first of all as a matter of human rights? Can an individual consider his and her own interest?


Governance criteria refers for instance to how companies use honest accounting methods that allow shareholders free choice. Those concerned about conflicts of interest may also want assurance that corporations avoid conflicts of interests about its decision of boards and don’t misuse politically motivated contributions to obtain unduly favorable treatment.

How successful is ESG investing ?

In less than 20 years, sustainable investing has grown from an isolated UN corporate responsibility initiative to a global phenomenon representing approximately USD 30 TB of assets under management. A new report from Morningstar estimates US money was invested into ESG – aligned goods and services in 2019 with revenue up 525 per cent from 2015.

The growing interest for sustainable investments is showing no signs of a slowdown and has been reinforced by the the Coronavirus Pandemic by renewing the discussion about interconnectivity between sustainability and financial systems.

Moreover, the appetite of investors for sustainable investing has been increased by the good financial performance of ESG products which has been equal, and even higher, than traditional products over the past few years.

What is Mifid II and their current requirements in terms of client suitability assessment?

The Markets in Financial Instruments Directive (MiFID) is designed to offer greater protection for investors and introduce more transparency in assets. It entered into force in 2018 and a third version of MiFID (MiFIDIII) is already in preparation.

MiFIDII is coordinated by the ESMA (European Securities and Market Authorities) which contributes to the smooth implementation of the directive by publishing Q&A and Guidelines and by providing technical specifications and technical advice.

For the moment, MiFIDII requires to assess the investment profile of clients by gathering information about the client’s:

  • Financial situation
  • Financial knowledge and experience
  • Investment objectives
  • Risk tolerance
  • Capacity to bear losses

In 2022, the assessment of ESG preferences will become compulsory. This means that portfolio managers will have to recommend more responsible investments by incorporating ESG preferences in their suitability process and investment strategies, on top of traditional investor preferences such as risk tolerance or financial knowledge.

This requirement may apply whether giving advice on a particular product or service or a managed portfolio.

What are the challenges of the new European ESG regulations?

There are lots of colors of green and one of the key challenges for financial institutions will be the structure around it for their customers and their financial instruments.

Challenge 1, assessing the sustainability of financial instruments

The first challenge for financial institutions will be to analyze and find relevant ESG metrics to rate their financial products according to the new European regulation. Most financial institutions are used to analyze the financial returns (risk/volatilty) of their products but assessing if these products match ESG criteria is much more challenging.

How to assess, for instance, the impact of a specific fund or company on biodiversity, climate change or circular economy?

To do so, most of them are collaborating with data providers to get ESG metrics, such as Arabesque, Vigeo or Sustainalytics to score their financial products.

Challenge 2, assessing the client’s appetite for sustainability

Once financial products are analyzed, a second challenge for financial institutions is to match financial products with clients’ ESG preferences, in line with the new MiFIDII regulation.

This is how our ESGprofiler can help!

How do you assess ESG preferences and promote responsible investments at Neuroprofiler?

At Neuroprofiler, we offer an ESGprofiler to assess the ESG preferences of your clients, in line with the coming MiFIDII ESG requirements.

The ESGprofiler allows your clients to discover their investment values through a fun investment game based on behavioral finance

Our ESGprofiler offers a predictability rate of 95% and has been audited by a recognized consulting firm regarding its compliance with MiFIDII. At the end of the process, a suitable and sustainable investment is recommended.

Will the ESG regulation have an impact beyond the European Union ?

The European Union is the first to have implemented a green taxonomy and the obligation to integrate the assessment of ESG preferences into the client suitability assessment process.

However, the growing interest for sustainable investments is global. Today, 80% of Millennials want to make a sustainable investment, vs. only 60% for the average investor (DeVere group study, 2020).

That is why similar regulations as in Europe are in preparation in other countries. A similar plan could be introduced by the Britain Government although the details and timing for the changes are not yet known.

In Switzerland, the assessment of ESG preferences and ESG factors is highly recommended but not yet compulsory.

In the US or in Canada, but also in international organizations like the IFC, green taxonomies are in preparation to promote responsible investment.

The next challenge for investment managers will be to find an alignment or correspondence between these different coming taxonomies.