Embracing ESG in European and Swiss Structured Products: the changing regulatory landscape.

A shift towards enhanced transparency, sustainability, and investor protection in the financial industry.

As ESG factors gain prominence in the investment world, European structured products markets are adapting to meet investors’ sustainability preferences.

Environmental, Social, and Governance (ESG) factors are becoming increasingly important for investors seeking to align their portfolios with sustainable principles. FAQs & Glossary

The European structured products market is no exception, as investors look for innovative solutions that cater to their ESG preferences.

This article discusses recent regulatory developments, including the ESMA consultation on revised MiFID II product governance guidelines and the final MiFID II suitability requirements.

These developments will shape the future of ESG-focused structured products in the European market.

1. ESMA Consultation on Revised MiFID II Product Governance Guidelines

On 8 July 2022, the European Securities and Markets Authority (ESMA) published a consultation paper proposing updates to the MiFID II product governance guidelines. The proposed changes aim to enhance the transparency and effectiveness of ESG-related structured products. Key proposals include:

1. Clearly specifying sustainability-related objectives for products linked to such goals, which will help investors better understand the products’ intended impact on the environment and society.
2. Defining target markets for complex products, including certain OTC derivatives or structured products, at the individual product level instead of using a clustering approach. This change aims to improve the accuracy of product marketing and suitability assessments.
3. Ensuring a compatible distribution strategy is determined, which will enhance the alignment between products and investors’ needs.
4. Conducting periodic product reviews in line with the proportionality principle, which will help maintain market efficiency and investor protection.

These updates, once implemented, will help align the structured products market with ESG objectives and improve investor protection.

1. ESMA’s Final MiFID II Suitability Requirements

On 23 September 2022, ESMA published its final guidelines on aspects of the MiFID II suitability requirements. The updated guidelines incorporate sustainability preferences, assessment of these preferences, and organizational requirements to train staff and maintain appropriate records of consumers’ preferences.

This development will ensure that structured products providers consider clients’ ESG preferences when offering investment advice and better align their products with investor values.

And likely influence further initiatives in the ESG ratings market, potentially affecting how sustainable structured products are rated and the ability of ratings providers to operate.

As the European structured products market evolves to accommodate growing ESG preferences among retail investors, regulatory developments such as the revised MiFID II product governance guidelines, final MiFID II suitability requirements, and the European Commission’s consultation on ESG ratings and factors will play a critical role in shaping the market’s future.

Investors and issuers must stay informed about these regulatory changes to successfully navigate the increasingly complex landscape of ESG-focused structured products in Europe.