Mifid II ESG regulation amendments come into force today, but are firms prepared?

The amendments come as part of the EU’s objective to meet the UN Sustainable Development Goals, but data suggests many firms are struggling to meet the compliance requirements.

Amendments to Mifid II come into force today, regarding the integration of sustainability factors, risks and preferences into certain organisational requirements and operating conditions for investment firms. But recently published data suggests that many buy-side firms are not yet ready to submit the data required by the new rules.

One of the key requirements is that fund managers must from today provide ESG data for all their EU products to their fund distribution channels. In March, FinDatEx (a pan-industry structure created to assist with standardising processes to facilitate the exchange of data between stakeholders) launched the European ESG Template (EET) to facilitate this exchange.

However, last week FE fundinfo released data suggesting that fund managers are still struggling with compliance, with more than half of those surveyed yet to submit the required data.

The template consists of 580 mandatory, conditional and optional fields, as well as country-specific requirements, making the process complex at both a fund and underlying individual share class level. In addition, from 1 January, 2023, the enforcement of the Sustainable Finance Disclosure Regulation (SFDR) means that even more fields will become mandatory to meet annual SFDR reporting requirements.

Speaking to The TRADE, Anita Karppi, head of ESG, CRO and strategic advisor at counterparty due diligence repository Plia, said: “The MiFID II ESG deadline is a step in the right direction to make firms become in control of their ESG data. Many buy-side and sell-side firms are still figuring out their companywide ESG strategies but are committed to ESG in the short/medium and long term.

“When it comes to regulation and standards, ESG is a fast-moving space and it’s imperative that firms are in control and committed to long term sustainability.”

To reach enhanced sustainability objectives, the amendments also include a wide range of additional elements: including the clarification of sustainability factors that investment firms should consider as part of their duties towards clients and potential clients. All processes, systems and internal controls of investment firms must now reflect sustainability risks, while investment firms must also be able to prove that they have appropriate arrangements in place to ensure that sustainability factors are included in the advisory practice.

ESG has been a huge topic of discussion amongst the trading community over the last few years. Earlier this year, the non-profit membership network Sustainable Trading was launched to drive sustainable solutions within the trading industry, with founding members including Aegon Asset Management, AllianceBernstein, ArchES, AXA Investment Managers, Bank of America, big xyt, BMLL Technologies, BMO Capital Markets, BTIG, Credit Suisse, Equinix, and Euronext.

“Introducing an engagement framework at the trading desk level to create practical and measurable ESG best practices will hopefully result in positive change across the industry,” said Frank Loughlin, global co-head of equity trading at AllianceBernstein, speaking to The TRADE earlier this year.

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