The European Commission Action Plan: An assessment of the reform areas for PRI signatories provides an overview of the main reform areas. Action 4 focuses on incorporating sustainability when providing financial advice. 

Key points

  • The European Commission is seeking to amend the MiFID II and Insurance Distribution Directive (IDD) delegated acts to ensure that sustainability preferences are taken into account in the suitability assessments undertaken by regulated entities.
  • The European Commission issued a public consultation because it wants to ensure that investment firms and insurance product distributors ask clients about their ESG preferences as well as offer investment advice that includes ESG considerations or objectives. The consultation is now closed.
  • Requirements will be specified through delegated acts to be adopted during 2019.


At present, MiFID II and the IDD require investment firms and insurance distributors to offer “suitable” products to meet their clients’ needs when offering advice, but do not contain specific requirements to ask questions regarding clients’ preferences concerning ESG issues. This leads to lower observable demand and reduced supply of ESG products: investment advisers have fewer incentives to respond to these considerations, and asset managers have little incentive to design suitable products.

In its final report, the HLEG recommends that investment advisers be required “to ask about, and then respond to, retail investors’ preferences about the sustainable impact of their investments, as a routine component of financial advice”. The Commission has acknowledged that uncertainty could be reduced if a revision of MiFID II’s delegated act explicitly incorporated investor preferences concerning ESG and sustainability into the suitability requirements associated with financial advice.

The proposed delegated Regulation will – if agreed – require investment advisors to ask about retail investors’ preferences regarding ESG, environmentally sustainable investments, social investments and good governance investment. It defines those terms as follows:

  • ‘ESG preferences’ means a client’s or potential client’s preferences for environmentally sustainable investments, social investments or good governance investments;
  • ‘ESG considerations’ means a consideration related to environmentally sustainable investments, social investments or good governance investments’;
  • ‘Environmentally sustainable investment’ means an investment in an economic activity that contributes to an environmental objective, and in particular an environmentally sustainable investment as defined in Article 2 of [insert reference to taxonomy Regulation when adopted]
  • ‘Social investment’ means an investment in an economic activity that contributes substantially to a social objective and, in particular, to tackling inequality, fostering social cohesion, social integration or labour relations, or an investment in human capital or economically or socially disadvantaged communities; and
  • ‘Good governance investment’ means an investment in companies following good governance practices and, in particular, companies with sound management structures, employee relations, remuneration of relevant staff and tax compliance.

This potentially offers a major step forward in integrating ESG issues in investment activity given the broad scope and importance of MIFID across the EU investment regulatory landscape.

While the emphasis in the action plan is on the retail sector, it is important to note that amendments to MiFID II are expected to apply to the work of investment consultants with their institutional clients.


Download the full report