2nd September

Sustainable Investments: Environment, Social and Governance Standards

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2nd September

Sustainable Investments: Environment, Social and Governance Standards


On 21 April 2021 Commission Delegated Regulation (EU) 2021/1253 amended Delegated Regulation (EU) 2017/565 regarding the integration of sustainability factors, risks and preferences in certain organisational requirements and operating conditions for investment firms.

The EU acknowledges that, to ensure the long-term competitiveness of its economy it is necessary to transition to a low-carbon, more sustainable, resource efficient economy. Essentially, the EU is seeking to reduce the overreliance on fossil fuels which produce greenhouses gases – a major contributor to climate-change.  To overcome this challenge the Commission published the Green Deal in 2019 which aims to transform the EU into a fair and prosperous society with a modern, resource-efficient and competitive economy in which there are no greenhouse gas emissions beyond 2050. In order to achieve this goal, it is necessary that investors are given clear guidelines to raise sustainable finances and to invest capital in sustainable investments.

In this regard, investment firms which provide investment advice and portfolio management ought to be able to recommend suitable and sustainable financial instruments both to existing and to prospective clients. Given that investment firms are required to act in the best interests of their clients, investment advice should consider financial objectives and sustainability preferences expressed by clients. To prevent mis-selling practices, in particular the misrepresentation of financial instruments or strategies as falsely fulfilling sustainability preferences, investment firms must analyse an existing or a prospective client’s investment objectives, time horizon and individual circumstances prior to asking for the clients’ sustainability preferences.

The EU also wishes to prevent “greenwashing” which is the practice of gaining an unfair competitive advantage by falsely recommending a financial instrument as environmentally friendly or sustainable. To prevent this malpractice, investment firms must not recommend or decide to trade in financial instruments where those financial instruments do not meet individual sustainability preferences.

In light of the above, the EU Commission amended Delegated Regulation (EU) 2017/565 by virtue of Commission Delegated Regulation (EU) 2021/1253 (the “Regulation”). The ensuing sections of this brief article shall outline the main amendments to Delegated Regulation (EU) 2017/565.


Summary of Amendments

The amendments may be categorised under two broad headings: (i) additions; and (ii) replacements or substitutions.


The Regulation added a definition of “sustainable preferences”. “Sustainable preferences” means a client’s or potential client’s choice as to whether and, if so, to what extent, one or more of the following financial instruments shall be integrated into his or her investment:

    1. a financial instrument for which the client or potential client determines that a minimum proportion shall be invested in environmentally sustainable investments; and
    2. a financial instrument that considers principle adverse impacts on sustainability factors where qualitative or quantitative elements demonstrating that considerations are determined by the client or potential client.

Replacements or Substitutions

The Regulation included a range of replacements including the following:

  • Investment firms must take into account sustainability risks.
  • Investment firms must consider the nature, scale and complexity of the business of the firm, and the nature and range of investment services and activities undertaken in the course of that business.
  • Investment firms should establish, implement and maintain adequate risk management policies and procedures which identify the risks relating to the firm’s activities, processes and systems, and, where appropriate, set the level of risk tolerated by the firm.
  • In relation to identifying conflicts of interest, investment firms must consider, at a minimum, whether the firm, a relevant person or a person directly or indirectly linked by control to the firm is in any of the following situations (whether as a result of providing investment, ancillary services, investment activities or otherwise):
    1. the firm or that person is likely to make a financial gain, or avoid a financial loss, at the expense of the client;
    2. the firm or that person has an interest in the outcome of a service provided to the client or of a transaction carried out on behalf of the client, which is distinct from the client’s interest in that outcome;
    3. the firm or that person has a financial or other incentive to favour the interest of another client or group of clients over the interests of the client;
    4. the firm or that person carries on the same business as the client; and
    5. the firm or that person receives or will receive from a person other than the client an inducement in relation to a service provided to the client, in the form of monetary or non-monetary benefits or services.
  • Investment firms must describe: (a) the types of financial instruments considered; (b) the range of financial instruments and providers, analysed per each type of instrument; (c) the sustainability factors considered; and (d) if providing independent advice, how the service provided satisfies the conditions for the provision of independent investment advice, and the factors considered in the selection process to recommend financial instruments, including risks, costs and complexity thereof.
  • Information about an existing or prospective client’s investment objectives must include information about the length of time for which the client wishes to hold the investment, risk preferences, risk tolerance, investment purposes and sustainability preferences.
  • Investment firms must have adequate policies and procedures to ensure that they understand the costs and risks of investment services and financial instruments selected for their clients, including any sustainability factors.
  • When providing investment advice or portfolio management, investment firms must not recommend or decide to trade where none of the services or instruments are suitable to the client and should provide an explanation to the existing or prospective client as to the reason why. Records of these decisions should be kept.
  • When providing investment advice, firms must provide a report to the retail clients which includes: (a) an outline of the advice given; and (b) an explanation of how the recommendation is suitable for client.


These amendments apply with direct effect from 2 August 2022. On 5 August 2022, the MFSA published its new Corporate Governance Code (the “Code”) which applies to inter alia to the provision of investment services. The Code provides that entities (including investment services entities) should embrace Environmental, Social and Governance (“ESG”) standards and Corporate Social Responsibility (“CSR”) principles and should have a ESG strategy or policy in place. The Code encourages entities to remain informed about initiatives being taken in local and international scenarios relating to the themes of ESG and sustainable finance. Accordingly, it would be prudent for the aforementioned amendments to be incorporated in the investment services entity’s ESG strategy.


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