Sustainable finance and its regulation have been in continuous transformation since the regulatory rollout began in 2018. However, five years later, the European Commission is still working on creating a defined framework for the financial industry to work with clarity.
That is why, in the 2023 ASEAFI Green Evolution, the current situation has been addressed, especially, what could happen in the coming years.
Read more about the implementation of the Green Mifid and find the latest economic news of the day with the Born2Invest mobile pp.
Challenges in the implementation of Green Mifid
Last August 2022, a new regulation arrived to further complete the sustainable finance puzzle. It is Green Mifid, which is nothing more than asking clients about their sustainability preferences. Something that, on the surface, may seem simple, but is not and is causing a certain amount of headaches in the industry, especially in terms of product creation. Something that Manuel Rodríguez Torrecillas, fixed-income fund selector at Abante, and Fernando Ibáñez, co-founder and CEO of Ética, have talked about.
“Many houses do not know how to fit Green Mifid and advisors sometimes do not even have a product offering aligned with what clients are answering in the preference tests. We are in a complex situation,” warns Rodríguez Torrecillas.
For Ibáñez, there is a great dissonance between the professional investor and the individual investor. “The professional investor has more means and more training, and when he decides to invest in a sustainable way, it is easier to find products for him,” he explains. However, the individual “still does not know what ESG is and it has no relevance for him. A great regulatory effort has been made, which has not been compensated in demand”.
Another worrying aspect has to do with the regulatory flood and the training of advisors. Regarding the first point, “we have to try to get all the information and regulation down without overwhelming the client so that it does not become too complex,” adds the Abante expert. While this same regulatory excess “can have the effect that advisors end up telling their clients that they have no or few preferences in sustainability in order to be able to offer them a wider range of products. In addition, there is a risk that the regulatory complexity will cause them to lose interest,” explains the CEO of Ética.
Grenn Mifid: Asset managers bemoan the regulatory misalignment
On the management companies’ side, Pilar Vila, head of marketing for Spain and Portugal at Schroders, and Ana Rosa Castro Aguilar, head of wealth advisory business at Nordea, analyzed how the new European regulations are being integrated for funds and management itself.
“It has been done in a very disorderly manner, there has been a lot of confusion due to the lack of definition and clarity. Therefore, I believe that this year has been and is being one of adjustments and adaptations and that we still have a long way to go,” lamented Vila. This view is also shared by Castro, who adds that “the same thing is being asked of all management companies without taking into account the particularities or size of each one”.
This lack of clarity has led to a large number of readjustments this year. For example, 350 funds classified as Article 9 were downgraded to Article 8 due to the lack of clarity in the regulations issued by Brussels.
To solve these problems, the two experts pointed out that they are putting a great deal of effort into training within each fund manager and also into transparency and research processes. “Clients are increasingly demanding greater clarity from us as to why a company is included in the portfolio in terms of sustainability,” said the head of the wealth advisory business at Nordea.
In summary, the implementation of Green Mifid, which seeks to understand clients’ sustainability preferences in finance, poses significant challenges. The lack of alignment between client responses and product offerings, as well as the gap between professional and retail investors, creates complications. Regulatory overreach could lead to unfavorable responses or disinterest. The management of these regulations has been haphazard, causing readjustments and confusion in the industry. Training and transparency are seen as key solutions to address these problems.
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First published in Funds&MARKETS. A third-party contributor translated and adapted the article from the original. In case of discrepancy, the original will prevail.
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