The European Securities and Markets Authority (ESMA), in collaboration with National Competent Authorities (NCAs), initiated a Common Supervisory Action (CSA) targeting the integration of sustainability within investment firms’ suitability assessments and product governance processes. This initiative underscores the evolving regulatory landscape and the importance of embedding sustainability into investment services.
Scope and Objectives of the CSA
With the CSA, ESMA and NCAs aim to evaluate investment firms’ adherence to the sustainability requirements introduced in 2022 through amendments to the MiFID II Delegated Acts.
Key areas of focus include:
- Client sustainability preferences: Assessing how investment firms gather and incorporate clients’ sustainability preferences into their advisory and management services.
- Product categorisation: Evaluating the mechanisms investment firms employ to understand and categorise investment products based on sustainability factors, ensuring accurate alignment with client preferences.
- Investment suitability: Reviewing the processes investment firms use to ensure that investment recommendations align with clients’ sustainability preferences, including the application of a “portfolio approach”.
- Target market assessment: Investigating how investment firms define sustainability-related objectives within their target market assessment for investment products.
CySEC’s Role and Expectations
The Cyprus Securities and Exchange Commission (CySEC), through its Circular C680 issued on 31 January 2025, announced its participation in the CSA. As part of this initiative, CySEC plans to conduct on-site visits and desk-based reviews of selected investment firms that offered investment advice and/or portfolio management to retail clients between 2 August 2022 and 31 December 2024, aiming to ensure consistent application of EU rules and bolster investor protection. Additionally, CySEC outlined its Supervisory Priorities for 2025, placing greater emphasis on fund managers’ compliance with sustainability and ESG obligations.
In its Circular C683, CySEC reaffirmed the applicable regulatory framework and sustainability-related obligations for investment firms. The circular emphasises the role of these obligations in advancing towards a more sustainable economy but also their alignment with the European Green Deal’s objectives.
Investment firms are encouraged to proactively align their practices with the outlined sustainability requirements. This includes refining processes for capturing sustainability preferences, enhancing product categorisation methods, confirming that their staff receives adequate training, and ensuring that investment recommendations genuinely reflect clients’ preferences.
By adopting these practices, investment firms will position themselves to better meet regulatory expectations and demonstrate their commitment to sustainable investing, ultimately enhancing their reputational standing and market competitiveness.
For a comprehensive look at this particular CSA, investment firms are advised to review the ESMA announcement and CySEC’s publications on the matter.
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