"Financial Backers Entitled to Guidance on Environmentally Responsible Investing"
In the third quarter of 2022, new requirements for financial advisors in Europe are expected to come into force, following the transposition of the EU's Sustainable Finance Disclosure Regulation (SFDR) into national law. This regulatory shift will bring challenges in the short term, particularly in addressing customers' knowledge and willingness to sacrifice yield for sustainable investment products.
The legal basis for these regulations is primarily the SFDR, complemented by evolving EU regulations such as the Corporate Sustainability Reporting Directive (CSRD) and the EU Taxonomy Regulation. The SFDR mandates financial market participants, including financial advisors, to disclose how sustainability risks and adverse sustainability impacts are integrated into their investment decisions and advice.
The European Supervisory Authorities (ESAs) are actively updating and clarifying rules under SFDR with new Regulatory Technical Standards (RTS) and guidance, effective in 2025. These updates concretize how sustainability must be considered and disclosed in investment advice, demonstrating that sustainability consideration is becoming a compliance obligation for advisors.
These SFDR-based requirements align with other EU initiatives like the CSRD, which standardizes corporate sustainability reporting, and the EU Taxonomy, which defines sustainable economic activities. The coherence among these frameworks is shaping the regulatory environment that financial advisors operate within.
The European Commission plans further regulatory overhaul by the end of 2025 to potentially create a new, label-driven regime for sustainability in finance, signaling that mandatory sustainability consideration in advice will become more robust and standardized.
In response to these changes, a platform called MyFairInvest has been developed to help private investors inform themselves about sustainable investing in a simple and understandable way. MyFairInvest provides a questionnaire to ask about aspects of sustainable capital investment and results in a document with the individual investment preferences of the investors. This document can be used supportively in the joint conversation with advisors to make the right investment decisions in line with sustainability.
Financial advisors are fundamentally obliged to consider the claims of their customers, including the new regulation in the area of sustainability. Customers must decide for themselves whether and to what extent they want to deviate from their original sustainability preferences. If no financial product available that meets the customer's sustainability preferences, products that do not match the original sustainability preferences can be sold with the customer's consent.
In the long term, sustainability will be a natural part of every advisory conversation. Financial advisors must ask clients about their individual preferences regarding sustainability and take these into account in the product offering and selection. Investors will have a right to sustainable investment advice in the future.
It is worth noting that the MiFID-II framework, which stipulates that investment objectives should be recorded, has been clarified to extend to sustainability objectives. However, no information about a data protection declaration was provided in the text regarding MyFairInvest's services.
Despite the challenges, these new requirements are intended to ensure that customers can rely on the recommendation of their advisors due to their inability to adequately evaluate various investment products in terms of risk, return, and sustainability. MyFairInvest offers its services free and independently, providing a valuable resource for both financial advisors and private investors navigating the complex world of sustainable investing.
[1] European Commission. (2021). Sustainable Finance: Overview of Regulatory Developments. Retrieved from https://ec.europa.eu/info/publications/sustainable-finance-overview-regulatory-developments_en
[2] European Supervisory Authorities. (2021). SFDR Guidelines on Non-Financial and Sustainability Information. Retrieved from https://www.esma.europa.eu/sites/default/files/library/2021-1726_esma-2021-1453_guidelines_on_non-financial_and_sustainability_information_under_article_8_of_regulation_2019_2088_of_the_european_parliament_and_of_the_council_on_sustainable_finance_disclosure_regulation.pdf
[3] European Securities and Markets Authority. (2021). SFDR Guidelines on Indicators of Sustainability Risks and Adverse Sustainability Impacts. Retrieved from https://www.esma.europa.eu/sites/default/files/library/2021-1726_esma-2021-1453_guidelines_on_indicators_of_sustainability_risks_and_adverse_sustainability_impacts_under_article_8_of_regulation_2019_2088_of_the_european_parliament_and_of_the_council_on_sustainable_finance_disclosure_regulation.pdf
[4] European Securities and Markets Authority. (2021). SFDR Guidelines on Climate-related Disclosures. Retrieved from https://www.esma.europa.eu/sites/default/files/library/2021-1726_esma-2021-1453_guidelines_on_climate-related_disclosures_under_article_8_of_regulation_2019_2088_of_the_european_parliament_and_of_the_council_on_sustainable_finance_disclosure_regulation.pdf
[5] European Commission. (2021). Sustainable Finance Disclosure Regulation (SFDR). Retrieved from https://ec.europa.eu/info/business-economy-euro/banking-and-finance/sustainable-finance/sustainable-finance-disclosure-regulation_en
Financial advisors will be required to disclose sustainability risks and impacts in their investment decisions and advice, as mandated by the SFDR and complemented by evolving EU regulations such as the CSRD and the EU Taxonomy. In the future, private investors can use platforms like MyFairInvest to inform themselves about sustainable investing and make decisions that align with their preferences, potentially using the information as a guide in discussions with advisors.
