Since August 2, distributors of investment products and insurers have been required to interview their clients in order to establish their investment profile in terms of sustainable finance. With this rule, which is part of the MiFID II directive (Markets in financial instruments directive) and the IDD (Insurance distribution directive), financial advisers must extend the scope of knowledge of their customers to sustainable finance. The aim is to determine the most suitable financial products for each investor profile.
Which investment products are concerned by this new obligation?
Laura Gehlkopf. – “Sustainable finance refers to investments that not only target financial return, but also take into account environmental, social and corporate governance criteria, known as ESG. Many studies conducted at European level highlight a proven interest of investors for this type of product. These investors understand that public investment is unlikely to be sufficient to finance ecological or social transformation projects.
ESG factors can therefore be taken into account in all types of product: investment funds, bonds, etc. Depending on its strategy, the product may or may not be recommended to investors who have expressed sustainability preferences.
Is it a supplement to the KYC process? Are we not creating a whole new field of financial compliance with ESG and the fight against greenwashing?
“It is a complement to the ‘know your client’ and ‘know your product’ processes, indeed. Investors’ sustainability preferences will now also have to be taken into account, following the process already established by the MiFID rules, which consists of asking questions about the financial situation, investment objectives, risk tolerance and financial expertise. Financial institutions must know their customers and the products they distribute, and this knowledge must now extend to ESG aspects, which go beyond financial compliance alone. This is also one of the characteristics of this new regulatory framework which aims to integrate extra-financial aspects into the regulations and practices applicable to finance.
Investors’ sustainability preferences will now also have to be taken into account, following the process already established by the MiFID rules, which consists of asking questions about the financial situation, investment objectives, risk tolerance and financial expertise.
What types of questions should financial advisors ask their clients?
“Your financial advisor will need to consider your sustainability preferences. He will therefore have to ask you a series of fairly specific questions to understand and meet your expectations. Such a discussion must be prepared, because the answers are not always obvious: do I, as an investor, have preferences regarding the environmental aspects or the social aspects of my investments? Do I want to see these aspects taken into account for my entire portfolio or for only a portion? Do I also want to take into account the negative impact of my investments on these factors? Your adviser should then help you formulate your objectives more precisely to establish a profile.
How will this procedure be documented?
“Most financial institutions use questionnaires to determine the investment profiles of their clients. These questionnaires had to be supplemented with new questions to cover customers’ sustainability goals in more detail.
As a result, how will the CSSF be able to carry out its supervisory mission?
“The CSSF’s task of ensuring that supervised entities comply with the MiFID II regulations when they provide investment advice or when they manage their clients’ portfolios has not changed. As before, we will verify with the supervision tools at our disposal that the financial institutions act in the interest of their clients, in particular by taking into account their investment objectives.
The CSSF’s task of ensuring that supervised entities comply with the MiFID II regulations when they provide investment advice or when they manage their clients’ portfolios has not changed.
What forms will controls take? Will new supervision tools need to be developed?
“As for the monitoring means and tools, these already exist and have always been used by the CSSF in the areas that fall under its supervision, whether it concerns off-site or on-site monitoring. ESG aspects had to be integrated into existing means and monitoring tools and we will refine them as regulatory changes and market developments occur.
At this stage, we expect supervised entities to comply with their regulatory obligations, of course, but also a real commitment to participate in increasing the level of understanding by investors of the framework applicable to sustainable finance. The title of financial adviser must take on its full meaning here.
Since June, the financial industry has set up the
European ESG template (EET)
to facilitate the exchange of ESG data between market players. Will there also be a check at the level of security issuers, if they correctly publish their ESG templates (EET)?
“The EET template is only an industry standard and is not a mandatory template. Changes to the MiFID sustainability regulation did not introduce a prescriptive model in this context. It is the responsibility of both producers and distributors to ensure that all information is provided, and that it is correct and relevant.
The title of financial adviser must take on its full meaning here.
Asset managers regularly struggle with the quality of the data reported by the companies included in the portfolio. How will the CSSF overcome the challenge of ESG data in its control missions?
“The problem of the availability and quality of data represents a real challenge, we are aware of it. We expect financial institutions to put in place pragmatic approaches that make it possible to obtain, control and use available data and to be able to adapt their processes according to developments in this area.
What type of expertise will the regulator need in the face of such regulatory developments? The supervised entities are recruiting new profiles related to sustainable finance. What about the CSSF?
“The CSSF is faced with the same challenges as the entities it supervises and also emphasizes the continuous upgrading of the knowledge of its agents, with in particular the development of a training program on the ESG theme, including a Compulsory module on sustainable finance in the program of courses for the admission course for the civil servant career, as well as certifying training for our in-house experts who are required to work on the subject on a daily basis.
The CSSF faces the same challenges as the entities it supervises and also emphasizes the continuous upgrading of the knowledge of its agents
If the purpose of the rule is to protect investors with an offer adapted to both their wishes and their knowledge, what role can financial education play? Is this a mission for the CSSF?
“Sustainable finance is a relatively complex subject and its objectives can only be fully achieved if investors have a sufficient understanding of the various concepts. This is essential to ensure a high degree of confidence in the regulatory framework that is being put in place. Remember also that, as with any other investment, you should only invest in products that you understand. A significant effort in terms of financial education is therefore necessary. In terms of sustainability and sustainable finance, the overall level of knowledge of all stakeholders in the financial system must rise.
The CSSF actively participates in financial education efforts, in particular through its Letzfin website, but financial sector professionals will also have a major role to play, by providing information to their clients and potential clients, among other things. , as part of the definition of their investment profiles. Thus, the question of sustainable finance will still require intense efforts in terms of pedagogy and financial education on the part of all stakeholders, but also curiosity and questioning on the side of investors.