The Commission intends to make the changes by amending delegated acts under the Markets in Financial Instruments Directive (MiFID II) (10-page / 398KB PDF) and the Insurance Distribution Directive (IDD) (9-page / 383KB PDF).
The proposed changes are significant for advisers and insurance distributors, and could potentially encourage more sustainable investments, according to insurance law expert Elaine Quinn of Pinsent Masons, the law firm behind Out-Law.com.
"Under current IDD rules, insurance intermediaries and insurance undertakings distributing insurance-based investment products (IBIPs) do not have to include questions on clients' ESG preferences in their suitability assessments when providing investment advice," she said. "It is a welcome development, therefore, that this will now change."
"Interestingly, European Commission research has found that only a minority of clients proactively raise ESG issues during the advisory process. This means that there is a need for firms and advisers to be proactive, 'ask about, and then respond to, retail investors' preferences about the sustainable impact of their investments, as a routine component of financial advice'."
"The change is likely to contribute to reorienting private capital flows towards more sustainable investments. It is raising awareness, and providing clients with greater choice, and therefore must be considered a positive step in the right direction. Although the rules are still in draft form, insurance firms distributing IBIPs can begin implementing the change now and make ESG assessments a mandatory part of every suitability assessment for clients," she said.
The current MiFID II and IDD framework directives require investment advisers and insurance distributors and intermediaries to carry out a suitability assessment before recommending a product to a customer. However, this suitability assessment is generally based on the customer's financial objectives and not on non-financial objectives, such as ESG considerations.
The new draft delegated acts, which have now been finalised by the Commission following a consultation exercise, clarify that customers' ESG considerations and preferences should be taken into account as part of the suitability assessment. They also propose a definition of 'ESG preferences': "a client's or potential client's choice as to whether and which environmentally sustainable investments, social investments or good governance investments should be integrated into his or her investment strategy".
The drafts form part of the Commission's wider work on sustainable investment, as set out in its May 2018 action plan on financing sustainable growth. They can only be officially adopted by the Commission once new disclosure provisions for sustainable investments and sustainability risks, which put in place an EU-wide definition for ESG considerations, have been agreed at EU level. The Commission is publishing them now to allow investment firms and insurance distributors to begin incorporating customers' ESG considerations and preferences into account.