Integrating Sustainable Finance into the MiFID II and IDD Investor Protection Frameworks

Studies have shown a gap between investors’ intentions and preferences on the one hand, and their actual behaviour on the other hand. This gap has been attributed to a perception of high volatility and less profitability in ESG investments, combined with a lack of knowledge and availability of ESG products. The new disclosure obligations on sustainability, introduced by the Disclosure Regulation, are an important part of the regulatory response to this problem. Disclosure, however, may not suffice to achieve one of the key goals of the European Commission’s Sustainable Finance Action Plan: reorienting capital flows towards sustainable investment. Even when investors are well-informed and convinced of the benefits of ESG products, this is not always reflected in their actual investment behaviour, because of the complexity of investment decisions, limited attention at the moment of choice and procrastination. Investment product distributors can therefore play an important role in bridging the gap between the values of investors and their actual investment choices. From this angle, this contribution critically assesses the changes to the MiFID II and IDD investor protection frameworks. In a first section we sketch the behavioural problems explaining why retail investors not always act upon their investment preferences, and the role of the investment product distributor in this respect. Against this background, a second section offers a critical overview of the most important changes to the MiFID II and IDD investor protection frameworks