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Latest MiFID Update Adds to Firms’ ESG Challenges

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Manufacturers of financial products are racing to complete their first ESG disclosures under MiFID II.

While the amendment to the Markets in Financial Instruments Directive was announced in April last year, the fact that this latest regulation comes into force when the next iteration of Europe’s broader sustainability law is just around the corner has set data managers’ nerves jangling.

From August 2, fund distributors must consult clients on their sustainability preferences using information given to them by the companies that put the products together. Among a long list of requirements, investment forms must explain the sustainability factors considered when selecting funds to offer their clients and put in place suitable risk management policies.

This, of course, places yet more data and data management responsibilities on firms’ shoulders. They must obtain product and client preference information – the latter through in-depth questionnaires – and incorporate that into their existing data frameworks.

“With these imminent amendments to MiFID II, fund managers need to provide ESG data in a standardised format for all products marketed in the EU to fund distribution channels so that the distributors can evaluate the end client sustainability preferences,” Kifaya Belkaaloul, Head of Regulatory at NeoXam told ESG Insight.

“This is an important change – ESG data is not only a vital part of the investment process, but also essential in adding weight to sustainability claims. The challenge this presents is that it requires firms to pull ESG data from multiple disparate sources, efficiently into a new format.”

Move Quickly

Financial institutions have been forced to put their MiFID preparations in place as they focus on preparations for the rollout of the latest instalment of the European Union’s Sustainable Finance Disclosure Regulation (SFDR) in January.

Volker Lainer, Head of Data Connections, ESG and Regulatory Affairs at data management company Golden Source, indicated that some firms had been slow to react in an interview with *ESG Insight* in May. He noted then that the company had received inquiries from firms that “needed to move quickly” on MiFID ESG.

A study published week by FE fundinfo, which provided fund investment data and technology, found that almost half of all companies that come under MiFID had yet to submit their European ESG Template (EET), a document through which firms comply with the regulation. The EET was created by FinDatEx in the spring to help firms present their sustainability reports regulations, including SFDR.

While there are other templates, EETs templates are rapidly becoming the go-to means of compliance. They are especially useful for companies that have declared themselves aligned with the SFDR’s Article 8 and Article 9 designations – the so-called light-green and dark-green categories that demonstrate the degree to which a fund’s constituents can be considered sustainable.

“If they have not started the process by now, they need to speed up or risk non-compliance,” the report said.

Lainer explained that Golden Source is helping its clients meet the new obligations in the same way it does for SFDR. Having selected the material environmental and social topics covered by the regulation, Golden Source aggregates data to portfolio level enabling customers to select their preferred sustainability threshold.

Data Gaps

The biggest challenge, he added, was one familiar to ESG compliance managers: a lack of appropriate data. The EET has 580 fields that must be filled by reporting firms, but Lainer said clients and prospective clients had said their data providers had openly told them that they cannot provide enough information to fill all those modules.

With the directive stressing the need for direct rather than derived or proxy data, Lainer said many companies have decided to tell regulators that they simply don’t have the right information. That’s seen as a way of circumventing the responsibility to explain and justify the backfilling of data gaps with other information, a move that could land them with punitive action.

The EET was released in March and MiFID ESG will see it used for the first time. At the time of release, however, industry voices warned that companies would have a hard time fulfilling all of its requirements.

Mikkel Bates, Regulatory Manager at FE fundinfo, told a Funds Europe webinar that funds would be leaving a lot of data fields empty this year.

Data companies – Golden Source, FE fundinfo and ISS ESG among them – have been quick to identify these challenges and have said they are putting together products to make EET submissions easier. Broadridge said its own solution aims to provide clients with a “match-ready” EET that is automatically pre-filled.

Last week, for instance, Spanish bank Banca March said it had selected Golden Source’s ESG Impact tool to manage its ESG processes including the new MiFID II amendment.

Nevertheless, more than new tools and software will be needed, said Belkaaloul.

“Ultimately, the firms who have a solid data architecture in place are those whose reporting houses will stand solid against the winds of regulatory change,” he said.

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