2nd August is approaching. In 4 months the integration of sustainability factors, risks and preferences into certain organisational requirements and operating conditions for investment firms within MIFID II regulation will come into force. And yet there are still doubts about the latest legislation’s amendments.
Interpretations aside, it is probably not the last time MIFID legislation will change, so any solution you’ll develop will presumably be subject to further adjustment. Meanwhile, we face these new complex requirements that will have a significant impact on the overall investment space and on the components of the customer journey.

The role of the investor has evolved

There is a before & after as far as the role of the investor is concerned. If we look at the changes, we see quite a shift in the level of involvement of the investor. Previously, the investor’s participation was largely passive, now he has become more involved, plays an active role, engages in the process and his considerations regarding sustainability are influenced by ESG, socials, sentiment, but also companies’ information, press, ESG violations. This change will of course modify how financial institutions deal with investors’ preferences.

The new MIFID amendments involve all the components of the investor journey: preferences, advice and ultimately reporting.

Client Preferences-based Advisory

When preferences enter the game, the advisor will have to capture the investor’s view on sustainability.
From 2nd August on the client will have the possibility to indicate that he has no sustainability preference or that he has A, B or C type of preference, where type A is linked to taxonomy regulation and type B & C are linked to SFDR regulation. More in detail, type A is about environment, type B & C are about environment and social goals. Truth be told, taxonomy is expected to include a social aspect in the future so consider future proofing customer journey and use the similarity and differences between the two as inspiration.

Certainly, to express the preferences and consequently build a sustainability preferences customer journey, the client has to make an informed decision. So first, the advisor must inform the client. Second step, the client may choose his preferences and select criteria. And once the client has determined how his sustainable investment should look, he can choose how much of such investment should be present in his portfolio. And only then the advisor can deliver his advice.

Advisory side, the users journey starts therefore with the preferences.

The keystone to this is having a solution that structures this information, where the overall alignment of the portfolio can be calculated based on product information and preferences are considered portfolio by portfolio building on a high level of personalisation we are not yet used to in the investment solutions.

Regarding investment proposals, we reckon there are quite important metrics to consider and calculate, e. g. the alignment of the sustainability. But also, what if situation where current impact, possible changes, and ways to reach a higher level of alignment on the portfolio needs to be shown.

The key point is: the client captures the preferences and then on a portfolio by portfolio basis you can showcase which holdings are completely in line with his preferences from a total perspective, and which holdings have one or two or three exceptions to either taxonomy, sustainability or adverse impacts.

All these kinds of information are required to come in a system and used in a system. Because both the advisor and the investor need all the data to make sure that informed decisions are to be made.

If you want to know more, access the recording of the webinar ESG as part of MiFID II