The EU Policy on Sustainable Finance: A Discussion on the Design of ESG-Fit Suitability Requirements

Abstract

The suitability requirements (SRs) regulated in the Markets in Financial Instruments Directive (MiFID) II have attained a new, additional role. Traditionally used to protect investors from abusive conduct perpetrated by advisers and portfolio managers, the SRs have now become a critical component of the EU policy on sustainable finance. In this new role, the SRs are expected to provide a unique setting for advisers and portfolio managers to identify, negotiate, and treat the environmental, social and governance (ESG) preferences of their clients. Reshaped SRs will empower those clients willing to allocate their savings to fund ESG-friendly projects and companies, and thereby, directly infuse sustainability into the financial system. The success of this policy, however, has required reform. This Article addresses the problem of how to design SRs that are adequate to the ESG context. The first part of the Article explains the rules governing the SRs in the MiFID II regime and outlines the European Commission’s proposed amendments to such rules. The second part of the Article identifies and critically analyzes various solutions suggested by the industry. The investigation relied upon European Union (EU) law and policy documents. Importantly, the content of sixty-four responses submitted by industry actors to the public consultation on this subject launched by European Securities and Markets Authority (ESMA) was also analyzed. The findings shed light on the contours and implications of the suitability obligation of investment advisers and portfolio managers in the realm of sustainable finance.