MiFID II sustainability preferences: insights from ESMA’s supervisory review 

ESMA’s recent Public Statement on the Common Supervisory Action (CSA) on MiFID II sustainability aspects paints a mixed picture: firms are clearly progressing in integrating sustainability into suitability assessments and product governance, but important inconsistencies remain. While implementation is advancing across the market, practices are still uneven (both across firms and jurisdictions). 

Key observations: where challenges persist 

ESMA identifies several recurring issues in how firms capture and apply sustainability preferences:

• Incomplete preference collection: Some firms limit assessments to their own product range rather than considering the full sustainability spectrum 
• Misclassification of clients: Clients without expressed preferences are sometimes treated as favoring non‑sustainable products instead of being “sustainability‑neutral” 
• Over-simplification of preferences: General sustainability interest is occasionally interpreted as no preference at all 
• Biased client engagement: Questionnaire design and disclaimers may unintentionally influence responses 
• Weak internal guidance: In some cases, firms lack clear procedures for handling neutral or unclear client preferences 

Operational constraints: matching preferences to products 

Even where preferences are properly captured, firms face practical limitations, such as: 

• Limited availability of sustainable products 
• Insufficiently granular questionnaires 
• Rigid advisory processes (e.g., requiring full reassessment) 

When preferences cannot be fully met, ESMA expects firms to adopt a flexible, client-centric approach, including proposing the closest matching products, allowing clients to adjust preferences, and ensuring full transparency throughout the process. 

Priority areas for improvement 

The CSA identifies several priority areas for enhancement: 

• Improved questionnaire design, balancing regulatory accuracy with usability 
• Consistent treatment of clients with no or only general sustainability preferences 
• Proportionate updating mechanisms, avoiding unnecessary re-collection of preferences unless client circumstances materially change 

Taken together, these expectations point toward a more harmonized, user-centric and operationally efficient framework. 

Looking ahead: SFDR review and simplification 

The upcoming review of SFDR is expected to bring greater clarity to product classifications and disclosures. This should, in turn, simplify MiFID II sustainability preference frameworks.  

During this transition, ESMA encourages supervisors to take a proportionate and dialogue-driven approach, allowing firms time to adjust while focusing enforcement on clear breaches. 

How to prepare: practical steps for firms 

As firms navigate this evolving landscape, the following actions provide practical and forward-looking steps to address ESMA’s findings and prepare for upcoming SFDR developments. The EY Luxembourg can support you throughout this journey, from diagnostic assessments to implementation and transformation. Key actions include: 

• Conduct a gap assessment: Assess current practices against ESMA findings and anticipate future alignment with SFDR 2.0 developments. Identify weaknesses in preference collection, matching logic and governance frameworks. 
• Enhance questionnaire design: Simplify and refine client questionnaires to ensure clarity, neutrality and sufficient granularity, while avoiding bias in how questions are framed. 
• Strengthen internal policies and governance: Formalize procedures for handling sustainability-neutral clients and those expressing only general preferences. Ensure consistent application across advisory channels. 
• Leverage technology and AI: Explore AI-driven solutions to improve preference matching, enhance client experience and enable more dynamic, personalised recommendations. 
• Train front-office teams: Equip advisors with the tools and understanding needed to engage clients in meaningful sustainability discussions without influencing outcomes.