ESMA’s call for evidence on the integration of ESG preferences on suitability and product governance arrangements

EFAMA responded to ESMA’s request for feedback regarding the integration of ESG preferences into suitability and product governance arrangements.
As a reminder, ESMA launched a CfE to gather feedback on sustainability integration in MiFID II. ESMA’s aim is to understand firms‘ compliance, investor experiences, and sustainable investment trends. ESMA and NCAs will assess responses and monitoring MiFID II compliance.
In their response, EFAMA expressed support for ESMA’s portfolio approach but noted potential practical limitations. They pointed out that the portfolio comparison format may not always be applicable, especially for institutional clients. Asset managers offering portfolio management services often respond to specific client requests and predefined investment guidelines, rendering ESMA’s recommended product comparisons less relevant.
EFAMA also emphasized the importance of including government bonds as eligible sustainable investments under SFDR. They argued that excluding sovereign bonds could result in a mismatch between low-risk offerings and clients with high sustainability expectations.
Regarding PAIs, EFAMA suggested caution in introducing additional PAIs beyond those specified in SFDR, as it could introduce unnecessary complexity. They stressed that only PAIs explicitly outlined in SFDR should be considered in suitability tests.
In terms of defining the target market for sustainability-related products, EFAMA explained a two-step process. It involves assessing whether a financial instrument aligns with the end client’s sustainability preferences and comparing the product features with client preferences.
EFAMA noted that sustainability-related objectives are defined by SFDR disclosures and generated annually for annual reports. They also highlighted that ESMA Product Governance guidelines are applied to assess products without sustainability factors, ensuring that clients with strong sustainability preferences do not receive recommendations for such funds.
Regarding the demand for sustainability features, EFAMA mentioned a lack of representative data but provided anecdotal evidence suggesting that clients with higher financial literacy may decline sustainability preferences more frequently. They also noted that many retail clients may have sustainability preferences but struggle to provide specific details.
Lastly, EFAMA addressed the challenges related to data availability and quality for financial instruments with sustainability features. They called for universally applicable standards and regulatory refinements to address these data-related hurdles.