Ollie Smith: In this special three-part video series on the future of MiFID II and ESG, I've been asking Morningstar's resident experts exactly what's coming down the line, when and how it's going to be implemented. Joining me in the studio today is Anastasia Georgiou, our director of client solutions and Andy Pettit, our director of policy research.
We've been discussing about the actual rule changes. Let's just discuss some of the challenges. What are those challenges going to be?
Andy Pettit: I think there's two big ones. So, one is making sure that these conversations happen consistently across the industry. And I think we're all aware that ESG is very multidimensional. There's a lot of different terminologies. There's no standardisation. And so, that's a big challenge coupled with the fact that these specifications are very granular.
So, while the rules are baked in and take effect on the 2nd of August, ESMA are currently conducting a consultation to get input to a set of guidelines to help people actually implement the rules. And in our own submission that we're drafting, we're looking at recommending that that aspect is addressed, and that there's a bit more standardised guidance.
And the second challenge, I think, leads on from that because of the granularity having ascertained those things, you've then got the job of matching them to products that meet those criteria. And because of various different timelines that are not joined up, that data is not available in the short term.
OS: You've mentioned data. Ana, what are the specific challenges with regards to data?
Anastasia Georgiou: Yeah. So, it's like Andy said, there's basically a data gap. So, the regulation comes into play on the 2nd of August. Most of the data that is required may not even be in the market. So, today, the only data that sort of meets the needs of the requirements is the SFDR flags, so these are the Article 8 and 9 funds in the market, and that's really only what we call Level 1. So, this is where the asset managers are defining whether the fund is Article 8 or 9. But the detail, so what is the minimum exposure within those products is missing as are the reports that will start to come out in January and also the sort of the taxonomy alignment piece.
What is coming out is a data set labeled the EET, so the European ESG Template, and that is something that is not actually regulated, but it will contain most of the data that advisors could use to help them define the appropriate products. However, as I said, it's not regulated. That doesn't start to come into play till June. So, it's not really clear how many asset managers will actually deliver that data to the market.
OS: Okay. Andy, just briefly, I mean, this is all very complex, isn't it? And I know that advisers certainly can find it very frustrating dealing with these kinds of evolutionary processors when it comes to regulation. Is there a danger that this just becomes a box ticking exercise that everyone does quite badly at?
AP: Yeah, that is a danger. I think it would also be a huge missed opportunity. And I think the key to avoiding that is preparation. So, advisory staff need to become confident in how to have these conversations and how to avoid almost intimidating clients with the granularity of it. And I think I see it very much as a staged approach.
So, first time around, you have a fairly high level of conversation. As more data, more products, more standardisation becomes available, then it's easier next time around to have a little bit more in-depth and a wider range of products available to match those preferences.
OS: For more on ESG and MiFID II, do check out our websites and indeed, our software, Morningstar Direct. Until next time, my greatest of thanks to Ana and Andy. I've been Ollie Smith for Morningstar.
