The big picture: reorienting investors towards more sustainable investments

The publication of the Sustainable Finance Package on 21 April 2021 marks another important step by the European Commission in its ambition to reorient retail investors towards more sustainable investments. The long-awaited legislative package includes six amending Delegated Acts on fiduciary duties, as well as investment and insurance advice, which will ensure that financial players include sustainability in their procedures and their investment services to clients.

This article highlights some of the upcoming challenges for financial institutions that offer investment advice and/or portfolio management and the impact on their product governance.[1]


Introducing the assessment of client’s sustainability preferences

In order to enhance (potential) clients’ awareness of the availability of sustainable financial instruments, a so-called “top-up” to the existing suitability assessment is introduced, i.e. the assessment of individual sustainability preferences. In a nutshell, this means that investment advisers will be required to obtain information not only about the client’s investment knowledge and experience, ability to bear losses, and risk tolerance as part of the suitability assessment, but also about their sustainability preferences. In doing so, the European Commission aims to empower retail investors to decide where and how their savings should be invested. This way, everyone would have a chance to make a tangible, positive impact on the climate, environment and society, if they wish to do so.

To make the suitability assessment, firms traditionally obtain their information via the so-called MiFID (Markets in Financial Instruments Directive) questionnaire and translate the client’s responses into a MiFID risk profile that defines an investment approach (often ranging from very conservative to very dynamic) and sets risk limits. By linking different investment strategies and (types of) financial instruments to these MiFID profiles, the firms ensure that their investment advice and portfolio management remain within the set limits and can thus be considered suitable for the client.

Adding sustainability preferences to this assessment will require firms to update their MiFID questionnaires with a number of additional questions. In addition it will impact their underlying processes, IT systems and databases. By integrating sustainability criteria, firms will be able to link client preferences to available products and investment strategies.

It goes without saying that such integration of sustainability will be a complex operation with transversal impacts on the entire investment offering chain. However, it can also be an opportunity to reconsider traditional suitability assessment approaches and increase the customer experience on this point, by integrating, for example, elements of gamification and neuroeconomics.

Types of financial products: introducing different shades of green and grey

To integrate sustainability preferences in the service offering, investment firms will have to subject their financial instruments and investment strategies to a newly defined classification. Both the investment firm’s staff as well as their clients will have to be educated and familiarize themselves with new terminology and product categories.

The following distinction in types of financial instruments must be made:

  • Financial instrument eligible for recommendation as meeting a client’s individual sustainability preference include:
    • Financial instruments that pursue a minimum proportion of sustainable investments in economic activities that qualify as environmentally sustainable under the EU Taxonomy Regulation[2];
    • Financial instruments that pursue a minimum proportion of sustainable investments as defined in SFDR[3]
    • Financial instruments that consider principal adverse impacts on sustainability factors, where elements demonstrating that consideration are determined by the client.
  • Other financial instruments without these specific features are not eligible for recommendation to clients that have individual sustainability preferences.

Accessible ESG data: a key challenge

The newly established “sustainability” distinction between different types of financial instruments will partly depend on the availability of instrument-linked ESG (Environmental, Social and Governance) data. Ensuring that such information is readily available and on point presents a key challenge to the financial services sector.

Besides putting a burden on manufacturers of financial instruments to deliver ESG data in relation to their products, distributors of financial instruments will have to perform an in-depth assessment of the available ESG data providers, and ultimately decide which data provider(s) to use in order to implement their ESG investment strategy. Furthermore, the integration of ESG data in the internal systems will require a substantial IT effort in terms of time and cost.

Further integration of sustainability risks: more work is ahead

The newly published Delegated Acts include an explicit obligation for investment firms to take into account sustainability risks when complying with the organizational requirements and to integrate sustainability risk into their risk management policies.

It should be pointed out that most investment firms have already made some degree of progress in integrating sustainability risks, in particular, following the implementation of the SFDR (Sustainable Finance Disclosure Regulation) requirements, earlier this year. However, more work is likely ahead on this point. There is an overall expectation in the market that demand for financial instruments and products with sustainable investment strategies and those that consider adverse impact on sustainability will continue to grow, as such products become mainstream.

Introducing sustainability to the product governance process

Going forward, manufacturers and distributors of financial instruments should consider sustainability factors as part of the product approval process of each financial instrument[4] intended for distribution to clients seeking financial instruments with a sustainability-related profile.

In doing so, the “target market” should be defined by the manufacturer and distributor at a sufficiently granular level. This effectively means that a general statement indicating that a financial instrument has a “sustainability-related profile” will likely not pass the granularity test. Rather, it is recommended specifying to which group of clients with sustainability-related objectives a particular financial instrument should be distributed. A negative “sustainability target market” must not have be defined.

Furthermore, the manufacturer must present the sustainability factors of a financial instrument in a transparent manner. This should enable the distributor to provide the relevant information to its clients.

The newly introduced requirements regarding product governance, as well as the distinction to be made among the different types of financial instruments, will likely trigger a further update of the selection process (often already modified to comply with SFDR). Consequently, the current product catalogue will also need to be re-assessed in view of these requirements.

Managing the risk of mis-selling or misrepresentation

Inclusion of sustainability factors in the advisory process and portfolio management can potentially lead to mis-selling practices or “greenwashing.” Investment firms are required to put in place appropriate arrangements in order to avoid such unwanted practices. As such, the investment firm must first assess a client’s or other investment objectives, time horizon and individual circumstances, before asking for his or her potential sustainability preferences.

Where the financial instruments do not meet the client’s sustainability preferences, the client should be able to adapt information on his or her sustainability preferences. In order to prevent mis-selling and “greenwashing,” investment firms should keep records of the client’s decision along with the client’s explanation in order to validate the adaptation.

Clearly, the identification of the client’s sustainability preferences and advising the client upon these preferences might generate additional transactions (and often times additional fees). In order to avoid churning[5], it should be feasible for investment firms to identify the individual sustainability preferences of their existing clients at the next regular update of their current suitability assessment. Furthermore, investment firms could decide to lower transaction fees or apply no transaction fees when rebalancing the client’s portfolio based on the establishment of the client’s first sustainability preferences.

Potential impact on conflicts of interest policies

The new situation, whereby the client’s sustainability preferences must be taken into account and sustainability risks must be integrated in the investment and advice process, might lead to additional conflicts of interest. As such, investment firms will have to review the Conflicts of Interests inventory and policy.

Enhanced information obligations to clients

In addition to the current information requirements when for investment firms when offering investment services to their clients, they should – where relevant – provide a description of the sustainability factors taken into consideration in the selection process of the financial instruments.

When providing investment advice, an explanation of how the sustainability preferences are taken into account by the advisor must be included in the suitability report.

Investment firms cannot recommend or trade financial instruments when those financial instruments does not meet the client’s sustainability preferences.. The investment firm should explain  why the financial instrument does not correspond to the client’s individual sustainability preferences. This explanation could be included in a “negative sustainability” paragraph in the suitability report, which is provided to the client. The financial instruments that are not eligible for individual sustainability preferences can still be recommended by investment firms, but not as meeting individual sustainability preferences.

In addition to elements of the newly published Delegated Act impacting the existing MiFID requirements, as described above, investment firms should also foresee appropriate training for their staff and guidelines for marketing material.


After publication in the Official Journal of the European Union, investment firms have 12 months to comply with the described requirements. The deadline is expected by early summer 2022, but the Commission indicates that the deadline may be delayed until October 2022.

How we can assist you

KPMG and KPMG Law specialists in MiFID and ESG can assist you in mapping the specific requirements for your business and provide the necessary measures for implementation. We can help move your organization towards a more sustainable overall approach.

Please do not hesitate to contact Filip Weynants (Partner KPMG Advisory), Isabelle Blomme (Partner KPMG Law) or your regular contact at our Regulatory team if you have any questions or require further information.


  1. See (draft) modifications brought by the Commission Delegated Regulation amending Delegated Regulation (EU) 2017/565 as regards the integration of sustainability factors, risks and preferences into certain organisational requirements and operating conditions for investment firms and the Commission Delegated Directive amending Delegated Directive (EU) 2017/593 as regards the integration of sustainability factors into the product governance obligations.
  2. As defined in Article 3 of the Taxonomy Regulation
  3. As defined in Article 2, point (17), of Regulation (EU) 2019/2088
  4. and in the other product governance and oversight arrangements
  5. The practice of overtrading in a client's account for the purpose of generating commission