Investment firms are required to identify their own specific sustainability risks arising from its activities, systems and process. They must then account for these risks within their risk tolerances, appetite, management policies and procedures.
Conflict of Interest
Investment firms are required to actively monitor conflicts of interest on an ongoing basis to ensure that investors interests are adequately protected. The process is now being extended to include those conflicts of interest that may arise from the integration of the client’s sustainability preferences. Investment firms will need to re-visit their existing conflict of interest arrangements and processes to ensure they are aligned with the new obligations.
In order for clients to understand the various types of sustainable financial instruments to make an informed decision, investment firms must provide advice which distinguishes between different financial instruments that pursue fully or partially environmentally responsible activities as defined under the Taxonomy Regulation [Regulation (EU) 2020/852] and sustainable investments as set out in the SFDR. Investment firms need to explain how the qualities of a particular investment meets their investors sustainability preferences as well as being transparent about those financial instruments that do not.
The current regulatory standards place an obligation on investment firms to prepare an appropriate suitability assessment during the provision of an investment advice or decision on a client’s portfolio. To avoid potential mis-selling or misrepresentation under this new regulation, investment firms also need to understand and document their clients’ sustainability preferences. A suitability assessment should incorporate both financial and sustainability objectives to ensure the firm acts in the best interests of the client.