Sustainability requirements product governance and suitability assessment: what does the AFM expect from you?
The Autoriteit Financiële Markten (AFM) conducted a survey of compliance with the sustainability requirements for product oversight & governance (POG) and the suitability assessment. We are positive about the steps that investment firms have taken, but compliance still needs improvement. Achieving a good match between investors’ sustainability preferences and investment products is crucial. To help the market make further progress, this ESG update contains additional clarification on the sustainability requirements for POG and the suitability assessment, as well as good practices from the market.
In short
- Investment firms have a key role in matching investors and investment products
- Surveyed firms are on track in designing the customer journey in the execution-only channel and explaining sustainability
- Additional steps are needed for assessment and collecting sustainability preferences
- A good match requires sustained effort from investment firms - despite challenges
Investment firms have a key role in matching investors and investment products
Investment firms play a key role in achieving a good match between investors’ sustainability preferences and the sustainability features of investment products. They know their clients, can translate preferences and offer guidance in a complex investment landscape. A good match strengthens client trust and offers commercial opportunities: almost half of investors pay attention to the sustainability of investment products.
Surveyed firms are on track in designing the customer journey in the execution-only channel and explaining sustainability
The AFM observes that all six surveyed investment firms are making efforts to improve compliance with the sustainability requirements. That is positive. We note that the design of the customer journey in the execution-only channel and the explanation of the sustainability element in the suitability assessment are on track.
Additional steps needed for target market assessment and collecting sustainability preferences
For product oversight & governance (POG), investment firms must specify sustainability objectives in detail in the (negative) target market. It helps to do this based on the three legal categories of sustainability preferences: taxonomy investments, sustainable investments within the meaning of the SFDR, and investments that take into account principal adverse impacts (PAIs). This facilitates alignment with sustainability preferences collected in the suitability assessment and ensures that “grey” products do not end up with clients who have sustainability preferences.
When collecting information on sustainability preferences, it is essential to obtain sufficiently detailed information. In the suitability assessment, investment firms must thoroughly gather investors’ sustainability preferences. This includes collecting detailed information when clients have a preference for one or more of the three legal categories of sustainability preferences, such as minimum proportions in the case of a preference for sustainable investments within the meaning of the SFDR and/or taxonomy investments.
A good match requires sustained effort from investment firms – despite challenges
The AFM understands that investment firms face challenges in complying with the sustainability requirements. Nevertheless, we expect them to continue making efforts to obtain sufficiently detailed information on clients’ sustainability preferences and on the sustainability features of investment products. We call on investment firms to take action to ensure compliance with the sustainability requirements.
In our second ESG update (download below), we provide additional guidance and examples to help investment firms make further progress. You will also find the main points from our survey and focus areas for the market. The factsheet “Collecting sustainability preferences: how it works” (download below) can be used by investment firms when obtaining information on clients’ sustainability preferences.
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