Asking investors about their preferences for sustainable investing should become part of the routine for financial advisors and asset managers from August 2022.
The European Commission adopted last year a Delegated Regulation to the introduce the assessment of suitability in the Markets in Financial Instruments Directive (MiFID) suitability questionnaires.
This new requirement applies for investment firms on regulated markets providing investment advice or discretionary portfolio management services (i.e. pension funds, banks, life insurance companies…).
On the 27th of January 2022, the European Securities and Markets Authority (ESMA) published a consultation paper to propose guidelines on how to incorporate sustainability preferences assessment in the client suitability process.
The consultation closes on 27 April 2022 and the final report is expected for Q3 2022.
The ESGprofiler to assess sustainability preferences
In order to address these regulatory changes and the growing appetite of financial markets for sustainable investments, Neuroprofiler has launched an ESGprofiler which assesses clients’ sustainability preferences through gamification and behavioral finance.
We describe below how the ESGprofiler can help financial firms to comply with the latest draft of the European Union guidelines.
ESGprofiler and sustainability preferences assessment under MIFIDII
The ESGprofiler captures the appetence of clients regarding the three aspects of sustainable finance defined by the European Commission.
The Delegated Regulation defines the notion of “Sustainability preferences” as one of these three aspects:
a) a financial instrument that is invested in environmentally sustainable investments, as defined in Article 2(1) of Regulation (EU) 2020/852 of the European Parliament and f the Council (*), in a minimum proportion determined by the client or potential client ;
b) a financial instrument which is invested in sustainable investments within the meaning of Article 2(17) of Regulation (EU) 2019/2088 of the European Parliament and the Council (**) in a minimum proportion determined by the client or potential client;
c) a financial instrument that addresses key adverse impacts on sustainability factors, with the qualitative or quantitative elements that demonstrate this being determined by the client or potential client.
The European Union considers that investment firms must get information from clients on all 3 limbs, cumulatively or in different combinations when selecting / recommending financial instruments.
Neuroprofiler helps financial firms not only to capture information on these three aspects, but also to match your product with clients’ preferences.
The ESGprofiler is incorporated as a secondary step in the suitability assessment.
The European Securities and Markets Authority (ESMA) mentions that sustainability preferences should be incorporated as a secondary step in the suitability assessment (i.e. after questions about the client’s investment objectives, risk tolerance, financial expertise and financial situation).
Through gamification, the ESGprofiler educates clients about the notions of sustainability, ESG and taxonomy.
The European Commission asks to financial firms to help clients in understanding the concept of ESG and sustainability preferences by explaining the differences between the 3 options descrobed above in non-technical terms.
The ESGprofiler adresses this requirement by eductaing clients abouth the notions of ESG, sustainability and taxonomy during a user-friendly journey. For further information, clients can access our gamified EDUprofiler.
The ESGprofiler gives the option to the client to contact an advisor to update his/her sustainability preferences.
If no products correspond to the client’s sustainability preferences, the client should be asked to adapt his or her sustainability preferences. This change should be recorded.
Thanks to behavioral finance, our ESGprofiler capture ESG preferences in an unbiased manner.
The guidance states that firms must capture client’s preferences and make investment decisions using an unbiased approach so as to not influence clients’ answers.
Beyond sustainable investment, the use of behavioral finance was highly recommended in previous ESMA guidelines:
In May 2018, following the adoption of MiFID II, ESMA has published revised guidelines on suitability. In particular, the 2012 guidelines have been largely confirmed and broadened in order to (…) take into account the outcome of studies in the area of behavioural finance.The ESMA
The ESGprofiler and the RECOprofiler helps you match your client’s ESG preferences with your product at the portfolio or financial instrument level.
The ESGprofiler can be customized and deployed in a couple of days, with no IT integration, to quickly capture your client’s ESG preferences before the deadline.
The guidelines indicate that with existing clients, information on sustainability preferences should be obtained at the next regular update of client information, or during the first meeting with the client / first provision of advice that occurs from 2 August 2022.
Contact us at email@example.com if you would like further information about our ESGprofiler.