MiFID II sustainability preferences

MiFID II sustainability preferences are a client’s choice about whether, and to what extent, sustainable investments should be part of their portfolio. Since 2 August 2022, firms giving investment advice or portfolio management must ask about them as part of the suitability assessment. The rules come from Delegated Regulation (EU) 2021/1253, which amended Delegated Regulation 2017/565. ESMA’s suitability guidelines explain how supervisors expect firms to apply them.

The legal definition

Article 2(7) of Delegated Regulation 2017/565 defines sustainability preferences as a client’s choice as to whether, and if so to what extent, one or more of these types of financial instrument shall be integrated into their investment:

1. Taxonomy-aligned. A financial instrument where the client determines that a minimum proportion shall be invested in environmentally sustainable investments as defined in the EU Taxonomy Regulation.
2. SFDR sustainable investments. A financial instrument where the client determines that a minimum proportion shall be invested in sustainable investments as defined in Article 2(17) of SFDR.
3. Principal adverse impacts (PAI). A financial instrument that considers principal adverse impacts on sustainability factors, where the client determines the qualitative or quantitative elements demonstrating that consideration.

A client can choose one, several or none of these. For the first two, they also set a minimum proportion.

The order of the assessment

ESMA expects firms to assess sustainability preferences after the other suitability criteria:

1. Assess knowledge and experience, financial situation and the client’s other investment objectives.
2. Identify the range of suitable products on that basis.
3. Then apply the client’s sustainability preferences to narrow that range.

Sustainability preferences are an additional filter. They can never make an otherwise unsuitable product suitable.

How to ask

• Ask neutrally. Don’t nudge the client towards or away from sustainable products, and never pre-select an answer.
• Explain the terms. Clients need to understand the difference between the three categories, and what a “minimum proportion” means, before they can choose.
• Collect enough detail. Get the minimum proportion for categories 1 and 2. For PAI, find out which adverse impacts matter to the client, such as greenhouse gas emissions, biodiversity or social and employee matters.
• Optionally ask about focus. Some firms also ask whether the client cares more about environmental, social or governance aspects. This can sit alongside the regulatory categories, but it can’t replace them.
• Record “no preference” properly. A client without preferences is sustainability-neutral. Record it as a deliberate answer, not a skipped question.

Existing clients and updates

Firms are not expected to contact every existing client at once. ESMA’s approach is to collect sustainability preferences at the next regular update of the client’s suitability information, or at the next advice event if that comes first.

Connecting preferences to products

Sustainability preferences only work if the firm knows the sustainability characteristics of its products. Most firms get this data from product manufacturers through the European ESG Template (EET), which carries the Taxonomy alignment, SFDR sustainable investment share and PAI considerations of each product. Under the amended product governance rules in Delegated Directive (EU) 2021/1269, manufacturers and distributors must also consider sustainability-related objectives when defining a product’s target market.

In the statement of suitability

The statement of suitability should explain how the recommendation meets the client’s sustainability preferences. If the client adapted their preferences, it should record that and why.

How Tervan handles sustainability preferences

Tervan includes a dedicated sustainability question set. It branches into minimum proportions and PAI choices only when the client says they have preferences. The answers carry through to the statement of suitability, which gets an extra section only when it applies. Adaptations are recorded in the same audit trail, with the wording the client saw.

Frequently asked questions

Since when must firms ask about sustainability preferences?

Since 2 August 2022, when Delegated Regulation (EU) 2021/1253 began to apply. It amended Delegated Regulation 2017/565 so that sustainability preferences form part of the client’s investment objectives in the suitability assessment.

What are the three categories of sustainability preferences?

A minimum proportion in environmentally sustainable investments under the EU Taxonomy, a minimum proportion in sustainable investments as defined in SFDR Article 2(17), and products that consider principal adverse impacts on sustainability factors, with the client choosing the qualitative or quantitative elements.

Can a client say they have no sustainability preferences?

Yes. ESMA treats such clients as sustainability-neutral, and firms can then recommend products with or without sustainability-related features.

What if no product matches the client’s sustainability preferences?

The firm cannot recommend a product that does not meet them unless the client adapts their preferences. The adaptation applies only to that assessment, and the firm must record the client’s decision and explanation.

This guide is general information about EU rules, not legal advice. National implementation and your regulator's guidance can add requirements. Check the primary sources linked above before relying on it.