Seven years after the entry into force of Directive (EU) 2014/65 (MiFID II), the Commission Delegated Regulation (EU) 2021/1253 of April 21, 2021 (Delegated Regulation), has introduced changes to MiFID II, with regard to the integration of sustainability factors, risks and preferences into certain reputational, procedural and organizational requirements and operating conditions for investment firms.

Under MiFID II, investment firms are required to carry out suitability assessments taking into account certain factors, allowing the recommendation of suitable products and financial instruments to clients and potential client.

With the entry into force of the Delegated Regulation, investment firms offering investment advice and portfolio management services must now recommend suitable financial instruments to their clients and potential clients and must question them in the suitability assessment to identify their individual sustainability preferences. In other words, the Delegated Regulation has integrated clients' sustainability preferences in the suitability assessments and in the selection process used by investment firms to recommend financial instruments.

In order for a financial instrument to be offered as a sustainable investment and for the client or potential client to choose to integrate it into their investment strategy, it must meet at least one of the following characteristics (sustainability preferences):

  1. The client or potential client determines that a minimum proportion shall be invested in environmentally sustainable investments in line with the Taxonomy Regulation (as defined in Article 2, point (1), of Regulation (EU) 2020/852 of the European Parliament and of the Council);
  2. The client or potential client determines that a minimum proportion shall be invested in sustainable investments as defined in Regulation (EU) 2019/2088 of the European Parliament and of the Council (SFDR);
  3. Considers principal adverse impacts on sustainability factors where qualitative or quantitative elements demonstrating that consideration are determined by the client or potential client.

In addition to the creation of these three categories of financial instruments, rules are also added defining the concepts of "sustainability factors" and "sustainability risks" with the definition provided in the SFDR, the Regulation on disclosure of sustainability-related information in the financial services industry, applicable to the aforementioned investment firms offering investment advice and portfolio management services.

However, the categorization regarding sustainability preferences in MiFID II is not fully aligned with the categorization of financial products as identified in the SFDR in Articles 6 (other financial products that are not included in Articles 8 and 9), 8 (products that promote environmental and/or social characteristics but that do not have sustainable investment as their primary objective) and 9 (products that have sustainable investment as their primary objective), thus raising doubts about the relationship and compatibility between the two legislative instruments.

As for the compatibility of MiFID II with articles 6 and 9 of the SFDR, we do not anticipate any obstacles:

  1. If the financial product does not promote environmental and/or social characteristics (article 6), it cannot be sold to clients or potential clients with sustainability preferences;
  2. If the financial product is aimed at sustainable investment (article 9), it can be sold to clients or potential clients with sustainability preferences.

More difficult is to find a middle ground between the MiFID II classification and the financial products in article 8 of the SFDR, as not all products covered by this article fulfill one of the characteristics defined above.

Does this mean that the financial products in article 8 of the SFDR cannot be recommended to clients who have sustainability preferences? Not necessarily. Such a conclusion will depend on the analysis of the concrete characteristics of the financial product. If the financial product meets at least one of the described characteristics at the time of the suitability assessment, it can be sold to clients or potential clients with sustainability preferences.

In practice, in certain circumstances, a financial product cannot be sold to clients or potential clients with sustainability preferences, but it may be marketed as promoting environmental and/or social characteristics under article 8 of the SFDR.

Restricting sustainable investment to only a few financial products could mean a step backwards in promoting corporate sustainability and safeguarding and promoting human rights.