New ESG Rules To Protect Everyday Investors

A new set of EU rules coming into force Tuesday will put fresh pressure on asset managers as they seek to steer everyday retail investors around the complexities of sustainable investing. The changes are the result of an amendment to the revised Markets in Financial Instruments Directive, or MiFID. It requires investment managers and financial advisers to understand and act on the “sustainability preferences” of retail clients. These investors, in turn, can hold asset managers to account if their ESG funds don’t meet expectations -- by not being as green as they might initially appear, for example.

In practice, many are still concerned about the lack of granular data on environmental, social and governance issues; the challenge of defining what makes for a sustainable investment; and uncertainty about how the new rules will be enforced by individual countries. Europe’s financial industry, which lobbied for the amendment to be delayed, warned it will cause “huge confusion” and “great legal uncertainty.” 

Under the new rules, sustainability is defined by piggybacking other parts of EU legislation such as the green taxonomy and the Sustainable Finance Disclosure Regulation. Investment firms are already struggling to apply EU metrics and assess the sustainability of certain investments.

Investment Advisers in EU Are Ignoring ESG, investigation shows. Further confusion stems from how national regulators in the bloc will enforce the rules. The International Capital Markets Association, a financial trade association, is among those calling on authorities to not prioritize supervisory action for at least a year. 

France’s market regulator AMF has said the new requirements will not apply to French investment advisers until 2023. The Dutch watchdog, AFM, told Bloomberg there may be “a lack of clarity” regarding appropriate products that match the ESG preferences of clients. A key hurdle is the lack of comparable data. Funds with similar holdings have reported wildly different minimum allocations to sustainable investments, mainly because regulator guidance can be interpreted in different ways, according to a recent analysis by Morningstar Inc. What’s more, around a third of the market is yet to submit any data on sustainability, according to FE fundinfo. Funds are filling out industry templates with almost 600 different fields.

The new MiFID requirement comes at a time when the ESG investing movement is facing criticism from multiple sides. Republicans have characterized it as a tool of the “woke” left. Meanwhile, some whistleblowers have suggested that ESG -- as practiced by the mainstream -- is more marketing than action.