The European Securities and Markets Authority (ESMA), the EU’s financial markets regulator, has released the findings of its Common Supervisory Action (CSA) regarding the integration of sustainability into investment firms’ suitability and product governance processes.
The exercise evaluated how firms across the European Union assess client sustainability preferences and ensure that financial products are correctly matched to those goals. While the review identified areas for improvement, ESMA has signalled a flexible approach to enforcement as the broader sustainable finance framework continues to evolve.
The regulator highlighted several critical themes emerging from the cross-border review, establishing interim expectations for firms in four primary areas:
- Client preferences: Improving the methods used to collect and process sustainability data from retail and institutional clients.
- Product matching: Ensuring the accurate categorisation of products to align with specific sustainability criteria.
- Portfolio management: Applying sustainability considerations at a holistic portfolio level rather than solely for individual transactions.
- Target market assessment: Refining how firms define the potential client base for sustainable investment products.
Reflecting a strategic shift toward reducing administrative burdens, ESMA has urged National Competent Authorities (NCAs) to adopt a “proportionate” supervisory stance. Rather than immediate enforcement, the regulator is encouraging national bodies to prioritise dialogue with firms during the current transition period.
The statement clarified that this lenient approach is intended to support firms as they adapt to shifting regulations, though it noted that clear instances of regulatory breaches or mis-selling will still face formal action.
ESMA has indicated that the results of the CSA will be used to inform future updates to the MiFID II Delegated Acts and related guidelines. The ultimate goal is to simplify the existing framework, making sustainability requirements more consistent and easier for firms to implement effectively.
“ESMA reaffirms the importance of sustainability and encourages firms to continue implementing the MiFID II requirements,” the regulator stated, acknowledging that the exercise took place during a period of significant legislative revision within the EU’s sustainable finance landscape.
