MiFID II Product Governance Obligations changes – Sustainability

3rd November 2022


The European Union’s goal is to create a climate-neutral economy by 2050. To reach this goal, over the past few years the European Union has implemented a variety of new rules and regulations, also concerning the financial market. Specifically in 2022, several new sustainable finance related measures at European level came and will come into force, which include the following:

Commission Delegated Regulation (EU) 2021/1253 (“MiFID ESG Regulation“) and Commission Delegated Directive (EU) 2021/1269 (“MiFID ESG Directive“)

The MiFID ESG Regulation and the MiFID ESG Directive apply as follows:

  • From 2 August 2022, new rules relating to organisational requirements and suitability assessments will come into force.
  • From 22 November 2022, new rules relating to product governance obligations including sustainability matters.

Please see our Article ESG: MiFID Suitability Assessment – Are firms and clients speaking the same language? for an overview of the suitability requirements contained in the MiFID ESG Regulation.

The MiFID ESG Regulation can be found here. The MiFID ESG Directive can be found here.

Background: what was required so far?

The MiFID II Delegated Directive (EU) 2017/593 establishes the obligation for MiFID firms to have explicit and appropriate product governance arrangements in relation to the manufacturing and distribution of financial products and services in place. The MiFID II Delegated Directive (EU) 2017/593 can be found here.

MiFID firms that manufacture financial products must amongst other things define a target market for the products they launch.

The ESMA Guidelines on MiFID II product governance requirements (“ESMA Guidelines”) set out that manufacturers should use the following list of five categories:

  • the type of clients to whom the product is targeted;
  • knowledge and experience;
  • financial situation with a focus on the ability to bear losses;
  • risk tolerance; and
  • compatibility of the risk/reward profile of the product with the target market and clients’ objectives and needs.

Distributors must then take these categories into consideration when defining a specific target market and ensure that they offer products that are in line with the needs, characteristics and objectives of the targeted client.

The ESMA Guidelines on MiFID II product governance requirements can be found here.

What are the new requirements?

From 22 November 2022, in accordance with the amendments applied to Article 9 of the Delegated Regulation 2017/565 (“MiFID II Level 2 Regulation”) by the MiFID ESG Directive, MiFID firms must update their product governance process and integrate sustainability matters when they manufacture and distribute financial products.

In particular, MiFID firms manufacturing financial instruments must take sustainability factors into account in product governance, approval and monitoring. Sustainability factors mean environmental, social and employee matters, respect for human rights, anti‐corruption and anti‐bribery matters.

Therefore, MiFID firms shall consider sustainability-related objectives in the analysis of potential target markets and the consistency of the objectives of the financial instrument with the needs, characteristics and respective objectives of the target market on a continuous basis. A negative target market does not need to be set.

In addition, sustainability factors must be presented in a transparent way that allow distributors to take into account the sustainability-related objectives of clients.

From an organisational perspective, the MiFID ESG Regulation also includes additional requirements for the adjustments of the prerequisites for the avoidance of conflicts of interest, as well as in risk management.

ESMA Guidelines

With regard to the ESMA Guidelines, it is expected that these will be amended by ESMA following the ongoing consultation and Consultation Paper related to the integration of the requirements of the MIFID ESG-Directive for product governance, which currently includes changes to the product governance target market category “clients’ objectives and needs” outlining that MiFID firms should also specify any sustainability-related objectives the product is compatible with.

For the practical applicability of product governance obligations, ESMA will issue a reviewed version of the ESMA Guidelines. The public consultation of the update of the ESMA Guidelines will end on 7 October 2022 and ESMA will consider the feedback in Q4 2022. It is expected that ESMA will publish a final report in Q1 2023.

The Consultation Paper can be found here.

What does that mean in practice?

Product governance arrangements must be put in place to ensure that products and services are consistent with the needs of clients and their sustainability-related objectives.

MiFID firms must therefore implement the following in their product governance process:

  • include sustainability-related objectives as part of the target market assessment;
  • investigate sustainability preferences as part of the target market assessment;
  • disclose sustainability factors of a product to distribution partners as part of an investment recommendation;
  • ensure that the sustainability factors of a product are consistent with the sustainability preferences of the relevant target market.

Entry into force

The MiFID ESG Directive comes into force on and applies directly from 22 November 2022.

In conclusion

MiFID firms shall consider additional sustainability and transparency requirements in a variety of processes and procedures in order to fulfil the additional ESG requirements and obligations towards investors and clients.

If you have any further specific questions or queries in this regard or require support in implementing the above, do not hesitate to reach out to our ESG Services Division.


Elisa Forletta-Fehrenberg


Patricia Nitschke