2DII flags ‘alarmingly low compliance’ with MIFID II ESG rules

More than half of EU investment advisers did not assess the sustainability preferences of their clients despite new rules requiring them to do so, according to a “mystery shopper” survey by prominent European sustainable finance think-tank the 2 Degrees Investing Initiative (2DII).

Investment advisers are required to conduct assessments of client sustainability preferences when giving advice under the EU’s revised MIFID II rules, which came into force last August. The changes are intended to put “sustainability considerations at the heart of the financial system” according to the European Commission.

Findings from the survey show that advisers broached the subject of sustainability preferences unprompted in only 48 percent of cases. 2DII carried out 253 visits in six EU member states to assess adviser behaviour.

Significant variability was found between different jurisdictions with Germany topping the scale at 74 percent of appointments where advisers met the MIFID II rules, followed by Denmark at 62 percent and Greece at 43 percent. Advisers in Estonia, Ireland and Romania followed the rules in 33 percent, 27 percent and 25 percent of appointments, respectively.

A significant proportion of advisers, some 42 percent, did not follow the MIFID II procedure of assessing the minimum proportion assets to be invested according to client sustainability preferences. The remaining advisers provided ranges for ESG allocations or left it to the client.

A broader assessment of the MIFID II regulatory definition of sustainability preferences from 2DII found that the framework would not accommodate impact-oriented financial products and doesn’t include an appropriate amount of detail for the market.

The results “reveal an alarmingly low level of regulatory compliance”, warned 2DII, and it is unlikely that there will be “any incentive structure for investment firms… to include more sustainable financial products” .

The think-tank has called on EU authorities to conduct a compliance review of MIFID II as soon as possible, and to clarify the definition of sustainability preferences.

Finally, 2DII has proposed the introduction of an EU training and certification regime for advisers, after noting knowledge gaps among advisers specifically in relation to impact investing, avoiding harmful activities and some environmental topics.

The European Commission has been contacted for comment.

Despite the shortcomings, 2DII’s findings suggests that MIFID II is having an impact on how European investment advisers approach client assessments and advice just months on from its introduction. The thinktank’s inaugural mystery shopper findings last year concluded that just a quarter of EU financial advisers asked their clients about environmental or social considerations.

The survey is part of 2DII’s retail investing research programme and received funding from the EU, German government and EU climate incubator EIT Climate-KIC.