MiFID II Sustainability Preferences: What the ESMA Common Supervisory Action Results Mean for Investment Firms

ByOfficer

Last updated: June 2026

A client tells your adviser they want their portfolio to do some good. The questionnaire captures only low taxonomy-alignment ranges, the product shelf cannot meet the initial preference, and the file does not explain whether or why the preference was adapted. On 6 May 2026, ESMA told supervisors across the EU that these are the types of weaknesses found in its common supervisory action, and that firms still have work to do on MiFID II sustainability preferences.

The statement matters because it is an EU-wide supervisory read-out on how the sustainability rules that went live in 2022 are being applied. Twenty-nine EU and EEA NCAs assessed a 245-firm CSA sample, and ESMA concluded from the national reports that progress is real but uneven. It also told authorities to talk to firms rather than reach for enforcement, except where there is a clear breach or mis-selling. That tone is the headline, and it is easy to read it as a reprieve. It is not. The findings are a map of where your suitability and product governance files are weakest.

Related reading: ESMA and EBA Suitability Assessment Guidelines

What the ESMA CSA actually was

ESMA announced the common supervisory action (CSA) in October 2023 and ran it with national competent authorities over 2024 and 2025. A CSA is a coordinated review: NCAs apply a shared methodology to a sample of firms in their own markets, then ESMA aggregates the national reports into a single picture. The goal was to test how intermediaries apply the sustainability requirements that entered into application in 2022 after the MiFID II Delegated Acts were amended.

Twenty-nine EU and EEA NCAs took part. The sample covered 245 firms, of which 153 were credit institutions and 89 were investment firms. The output is the public statement ESMA35-915049491-6291, dated 6 May 2026, plus a set of high-level interim supervisory expectations. The part teams get wrong is treating a CSA as a one-off audit that closes when the report lands. ESMA says it will feed these findings into future updates of the MiFID II Delegated Acts on sustainability and the related ESMA Guidelines. This is a forward signal, not a backward-looking grade.

The legal basis you are measured against

Two instruments do the work. Commission Delegated Regulation (EU) 2021/1253 amended Delegated Regulation (EU) 2017/565 to fold sustainability factors, risks and preferences into the conduct rules for investment firms. It applies from 2 August 2022, and it introduced the defined term “sustainability preferences” into the suitability assessment. On the product side, Commission Delegated Directive (EU) 2021/1269 amended Delegated Directive (EU) 2017/593 to bring sustainability factors into the product approval and oversight process. It applies from 22 November 2022. Because it is a directive, the operative text sits in your national implementing measures.

The defined term rests on three building blocks: the proportion invested in environmentally sustainable activities under the Taxonomy Regulation (EU) 2020/852, the proportion in sustainable investments as defined by the Sustainable Finance Disclosure Regulation (Regulation (EU) 2019/2088), and the consideration of principal adverse impacts. None of those three was built for a retail conversation, and the CSA confirms that explaining them to clients is where firms struggle most. Our coverage of the EU sustainability reporting framework shows how the same definitions travel across the wider rulebook.

Collecting MiFID II sustainability preferences: where the questionnaires fall short

ESMA found a clear move towards more detailed questionnaires than the early implementation phase produced. The granularity varies widely. Some firms collect preferences only for the product categories they themselves offer, which reflects a thin shelf rather than a genuine assessment of what the client wants. On standardised minimum proportions, only a few firms offer options up to one hundred percent. For taxonomy-aligned products the ranges tend to stay below ten percent. For SFDR sustainable investments, ranges start at five to ten percent and reach higher bands such as fifty to seventy-five percent or above at some firms. On principal adverse impacts, most firms use qualitative groupings; only a few collect preferences at the level of specific PAI indicators.

The deficiencies are the ones to act on. Several jurisdictions had firms with no clear procedure for clients who express no sustainability preference. Some of those firms failed to treat such clients as “sustainability neutral” as the ESMA guidelines prescribe, and instead offered them only products without sustainability features. In some markets, a client expressing a general interest in sustainability but no detailed preference was recorded as having no preference at all. ESMA also flagged neutrality: some firms used disclaimers inside their questionnaires that could steer client choices, with no formal policy to keep the engagement neutral.

One trap deserves its own line. When a client expresses preferences across more than one of the three categories, firms split between applying them alternatively and applying them cumulatively, and most do not tell the client which method they used. ESMA’s view, drawn from its 2023 Call for Evidence (ESMA35-43-3599), is that information cannot be fair, clear and not misleading unless the client is told when their preferences are treated as alternative rather than cumulative.

Categorising products and the suitability match

Firms have built policies to map the ESG characteristics of instruments, but the maturity differs. Some rely on only part of the picture, for example SFDR classifications alone or PAIs alone, often because the underlying data is patchy and manufacturer disclosures are inconsistent. This is where teams over-read the rule. ESMA did not demand maximum granularity. Pending the broader SFDR and Retail Investment Strategy reforms, it accepts proportionate categorisation that reflects available data, provided the approach is consistent, well-documented and sufficient to support a MiFID-compliant suitability assessment. The compliance task is documentation and consistency, not perfect resolution.

On the match itself, the portfolio approach is common: firms apply preferences on average across the whole portfolio, or to the part the client wants invested in sustainable products, with the whole-portfolio method most frequent. ESMA’s caution is procedural. Whatever approach you pick, articulate it clearly in your internal arrangements, because that is what keeps the application of client preferences consistent. The same control discipline applies here: method, ownership and evidence must be documented. An undocumented method is a finding waiting to happen.

Adapting preferences and the record you keep

When no product meets a client’s initial preferences, most firms run an automatic control that lets the client adapt those preferences at the point of the specific recommendation, or when entering a portfolio management agreement. In line with the guidelines, firms generally raise the option to adapt only once it is clear the initial preferences cannot be met.

Two patterns drew criticism. Some firms recommended a product that did not meet the client’s initial preferences before the client had adapted them, simply noting that the proposal deviated and that suitable products were not available. And some firms applied a single adaptation to the client’s overall profile, forcing a full re-do of the questionnaire, without telling the client that the change would affect every future recommendation. The guidelines treat adaptation as specific to the advice in question, not a permanent rewrite of the profile.

Record keeping is the quiet failure. ESMA found that not all firms keep complete records of the preferences collected, the matching, and the adaptations made. The weakest spot is the rationale behind an adaptation: some firms store only the final preferences the client landed on, with nothing on the steps that got them there. For a supervisor reconstructing an advice file two years later, that gap is the difference between a defensible recommendation and an unexplained one. Build the audit trail for the adaptation, not just the outcome.

Product governance and the negative target market

Inside the product governance framework, most firms have developed ways to specify the sustainability-related objectives their products are designed to meet. The detail varies a lot. Some firms define objectives too coarsely to allow a real match to client preferences, and some have not built the process to identify those objectives in the target market assessment at all.

The thinnest area is the negative target market. ESMA found that only a few firms consider sustainability-related objectives in the negative target market assessment for products that do not consider sustainability factors, as foreseen in ESMA_QA_2129. In plain terms: where a product does not consider sustainability factors, the firm should assess whether the product is incompatible with any sustainability-related client objectives and document the conclusion. Where that assessment identifies incompatibility, the negative target market and distribution strategy should reflect it. Our note on how product-level sustainability disclosure works in the UK regime shows how a parallel framework approaches the same matching problem.

Why ESMA chose dialogue over enforcement

The supervisory stance is tied to timing. ESMA ran this exercise while the wider sustainable finance framework is being rewritten. The review of the SFDR is expected to produce a clearer framework for sustainability-related product disclosures, which will then require updates to the MiFID II sustainability-preference requirements. Asking firms to perfect a process that is about to change would burn resources for little gain.

So ESMA invited NCAs to take a proportionate approach, to favour dialogue during the transition, and to hold enforcement back except for clear breaches or mis-selling. Read the carve-out carefully. Steering a client through a leading disclaimer, recording a sustainability-interested client as preference-free, or recommending off-preference products without offering adaptation are not transition wrinkles. They are the types of conduct weaknesses NCAs can still escalate where they amount to clear breaches or mis-selling. The proportionate stance protects firms making a genuine effort on a moving framework. It does not protect firms cutting corners on investor protection.

Frequently Asked Questions

Does the ESMA statement create new reporting obligations?

No. It is a set of findings and high-level interim supervisory expectations, not a new rule. The underlying obligations remain those in Delegated Regulation (EU) 2021/1253 and Delegated Directive (EU) 2021/1269, applicable since 2 August 2022 and 22 November 2022. What changes in practice is the lens NCAs will use in their next supervisory cycle.

Which firms were in scope of the common supervisory action?

The CSA covered firms providing investment advice and portfolio management under MiFID II. The sample was 245 firms across 29 EU and EEA national competent authorities, including 153 credit institutions and 89 investment firms, with each NCA selecting a representative sample for its market.

What is a “sustainability neutral” client and why does it matter?

Under the ESMA guidelines, a client who does not express sustainability preferences or answers “no” may be considered sustainability neutral, meaning products with and without sustainability features can be recommended where otherwise suitable. The CSA found firms that instead offered such clients only non-sustainable products, which is a deficiency. The status protects client choice rather than restricting it.

Do clients have to be told whether preferences are applied alternatively or cumulatively?

ESMA’s position, drawing on its 2023 Call for Evidence, is that information must be fair, clear and not misleading, which means clients should be clearly informed when preferences across the three categories are treated as alternative rather than cumulative. Most firms in the sample did not communicate the method they used.

How much record keeping is enough for sustainability preferences?

ESMA expects records of the preferences collected, the matching to products, and any adaptation to be complete, clear and traceable. The specific gap it identified was the rationale behind a preference adaptation. Storing only the final preference, without the steps that led there, was treated as insufficient.

What does the negative target market assessment require?

For a product that does not consider sustainability factors, ESMA_QA_2129 expects firms to consider whether the product is incompatible with any sustainability-related client objectives. Depending on the product, that assessment may or may not identify a negative target market for the criterion “sustainability-related objective”. The point is to keep the distribution strategy aligned with the clients the product is and is not designed for.

Should firms wait for the SFDR review before fixing their process?

The interim expectations apply now. ESMA accepts proportionate, well-documented approaches during the transition, but the deficiencies on neutrality, adaptation, record keeping and the negative target market are not contingent on the SFDR review. Those are present-tense items to address.

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Key Takeaways

  • ESMA published the results of its common supervisory action on MiFID II sustainability aspects on 6 May 2026 (statement ESMA35-915049491-6291), covering 245 firms across 29 NCAs.
  • The obligations tested come from Delegated Regulation (EU) 2021/1253 (applicable 2 August 2022) and Delegated Directive (EU) 2021/1269 (applicable 22 November 2022).
  • Questionnaires have improved but stay uneven; taxonomy ranges often sit below ten percent and SFDR ranges start at five to ten percent, frequently tracking the firm’s own shelf rather than the client.
  • Key deficiencies: no procedure for clients with no preference, failure to treat them as sustainability neutral, non-neutral questionnaires with leading disclaimers, and recording sustainability-interested clients as preference-free.
  • Record keeping on the rationale for preference adaptations is a recurring gap; build the audit trail for the adaptation, not just the final outcome.
  • Only a few firms address sustainability objectives in the negative target market assessment under ESMA_QA_2129.
  • ESMA asked NCAs to favour dialogue over enforcement during the transition, but expressly preserved enforcement for clear breaches or mis-selling.
  • The findings will feed future updates to the MiFID II Delegated Acts and ESMA Guidelines, so treat them as a signal for the next supervisory cycle.

Sources and References

  • ESMA, Public Statement, “ESMA presents the results of the Common Supervisory Action on MiFID II sustainability aspects” (ESMA35-915049491-6291), 6 May 2026: esma.europa.eu
  • ESMA news, “ESMA promotes proportionate supervision of MiFID II sustainability requirements”: esma.europa.eu
  • CSSF, “ESMA statement on the results of the common supervisory action on MiFID II sustainability aspects” (June 2026): cssf.lu
  • Commission Delegated Regulation (EU) 2021/1253 of 21 April 2021 amending Delegated Regulation (EU) 2017/565 as regards the integration of sustainability factors, risks and preferences (applicable from 2 August 2022): eur-lex.europa.eu
  • Commission Delegated Directive (EU) 2021/1269 of 21 April 2021 amending Delegated Directive (EU) 2017/593 as regards the integration of sustainability factors into product governance obligations (applicable from 22 November 2022): eur-lex.europa.eu
  • Directive 2014/65/EU (MiFID II): eur-lex.europa.eu
  • Regulation (EU) 2019/2088 (Sustainable Finance Disclosure Regulation, SFDR): eur-lex.europa.eu
  • Regulation (EU) 2020/852 (Taxonomy Regulation): eur-lex.europa.eu
  • ESMA, Call for Evidence on MiFID II suitability and sustainability (ESMA35-43-3599), 2023: esma.europa.eu
  • CSSF, “MiFID rules related to sustainability” (August 2022): cssf.lu

What to fix before your next supervisory conversation

Treat this statement as a checklist, not a clearance. Pull a sample of your own advice files and ask three questions of each: did the client get a neutral, jargon-light way to express preferences across all three categories, were they told whether those preferences are alternative or cumulative, and does the file explain why any adaptation happened. Then look at your shelf. If your taxonomy-alignment ranges are capped at low levels because that is all you stock, the questionnaire risks describing your inventory rather than the client’s preference. ESMA gave the EU a transition window with one condition attached. Firms that use the transition period to close the neutrality, adaptation and record-keeping gaps will be better placed for future supervisory dialogue and any later updates to the MiFID II sustainability framework.

Disclaimer: The information on RegReportingDesk.com is for educational and informational purposes only. It does not constitute legal, regulatory, tax, or compliance advice. Always consult your compliance officer, legal counsel, or the relevant supervisory authority for guidance specific to your institution.

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