Accountability in EU Sustainable Finance : Linking the Client’s Sustainability Preferences and the MiFID II Suitability Obligation

Doubts remain in EU sustainable finance policy as to the role that the MiFID II suitability obligation will play in making sure that advisors and portfolio managers adequately service their client’s sustainability preferences. This article tackles this problem by examining the link between ‘sustainability preferences’ and the suitability requirements set forth in article 25(2) MiFID II. To this end, four versions of draft delegated act (DDA)—issued by the Commission over the 2018-21 period and aimed at modifying the MiFID II Delegated Regulation (EU) 2017/565—are analysed and discussed.After introducing the MiFID II rules on suitability, the notion of sustainability preferences is defined. Subsequently, a critical analysis is offered as to whether a client’s sustainability preferences should be subsumed into the definition of a client’s ‘investment objectives’ in article 25(2) MiFID II. Two policies are identified: a policy of ‘alignment’ by which the client’s sustainability preferences constitute investment objectives, and a policy of ‘decoupling’ whereby the definitions of preferences and of investment objectives are bifurcated and deemed to be independent concepts. Although the Commission’s stance has oscillated between these two distinct policies over time, it seems to be the case that the Commission has tilted to the side of alignment in its latest DDA (2021).In the last section of the article, the accountability effects of alignment and decoupling are identified and discussed. The policy of decoupling is found to be suboptimal owing to weaker liability incentives by investment firms to adequately treat their clients’ sustainability preferences. Decoupling connotes a more fragile model of investor protection. Conversely, a policy of alignment promotes a more effective enforcement of the MiFID II suitability requirements for the benefit of investors. The discussion presented in this article helps us delineate the MiFID II investor protection standards in sustainable finance policy