Markets in Financial Instruments Directive II (MiFID II)

The Markets in Financial Instruments Directive (MiFID II – Directive 2014/65/EU) aims to regulate and foster fair, transparent and efficient financial markets in the EU and to improve investor protection. Its rules are intended to boost trust and confidence in the financial industry while promoting the development of well-functioning and interconnected European capital markets.

MiFID II imposes a series of measures, which include:

The suitability assessment: when providing any type of investment advice and portfolio management services, investment firms shall assess whether any given investment is suitable for their clients, based on the clients’ characteristics (e.g., knowledge and experience, loss-bearing capability, investment objectives);
Greater transaction transparency: MiFID II strengthens the requirements regarding the “appropriate information” that an investment firm must provide in good time to its clients.

From a sustainability perspective, the two aspects of the Directive that are most relevant are: Organisational requirements and conduct of business (suitability) and Product governance (manufacturer/distributor obligations).

Organisational requirements and conduct of business (suitability):

In April 2021, the EU adopted Delegated Regulation (EU) 2021/1253 to further strengthen sustainability ambitions, which expands the existing MiFID II suitability assessment to include clients’ “sustainability preferences”. Article 1 of this Delegated Regulation defines “sustainability preferences” as a client’s choice to invest in financial instruments that:

Pursue a minimum proportion of environmentally sustainable investments as defined by the EU Taxonomy Regulation (EU Taxonomy); and/or;
Pursue a minimum proportion of sustainable investments as defined in Article 2, point 17 of the Sustainable Finance Disclosure Regulation (SFDR); and/or;
Consider Principal Adverse Impacts (PAIs) on sustainability factors.

In practice, this means in-scope firms providing investment advice or portfolio management must:

Ask clients whether and to what extent they want each of the three types of sustainable instruments integrated;
Record those preferences and ensure recommendations/portfolio allocations are consistent with them (or properly adapt them with clear rationale and client agreement).

Product governance (manufacturer/distributor obligations):

Product governance obligations under MiFID II are set out at Level 2 by Commission Delegated Directive (EU) 2017/593, which supplements the Directive with rules on the safeguarding of client financial instruments and funds, and on product governance more broadly.

These obligations were extended to sustainability matters by Commission Delegated Directive (EU) 2021/1269 of 21 April 2021, which amended Delegated Directive 2017/593 specifically to integrate sustainability factors into the product governance framework; this amendment entered into force on 22 August 2021, and Member States were required to apply its provisions from 22 November 2022.

Under the amended regime, product manufacturers must identify any sustainability-related objectives a given financial instrument is designed to meet, and both manufacturers and distributors must factor those objectives into the product’s target market assessment, including the negative target market, i.e. assessing whether a product that does not take sustainability factors into account could be incompatible with clients who hold sustainability objectives. In practice, these product governance requirements are the manufacturer/distributor-side counterpart to the client-facing suitability obligations under Delegated Regulation (EU) 2021/1253: together, the two Delegated Acts ensure that sustainability considerations are addressed both at the point a product is designed and approved, and at the point it is recommended to an individual client.

Following the amendments to MiFID II, the European Securities and Markets Authority (ESMA) updated the Guidelines on MiFID II suitability requirements (“Guidelines on certain aspects of the MiFID II suitability requirements”, the “Guidelines”), which provide guidance to financial firms in scope of MiFID II on the application of certain aspects of the MiFID II suitability requirements.

In addition, ESMA’s Guidelines and Q&As shape how the Level 1 and Level 2 sustainability rules are applied in practice across the EU, promoting supervisory convergence among national competent authorities. Specifically:

ESMA Guidelines on suitability (including sustainability): ESMA’s Guidelines on MiFID II suitability requirements, finalised September 2022 and applicable from 3 October 2023, incorporate the sustainability-preference rules under Delegated Regulation (EU) 2021/1253. They clarify how firms should collect preferences, treat clients with no stated preference as “sustainability-neutral,” and keep robust records of matching decisions.
ESMA product governance guidelines: ESMA’s Guidelines on MiFID II product governance requirements, finalised 27 March 2023 and applicable from 3 October 2023, integrate the sustainability amendments under Delegated Directive (EU) 2021/1269. They clarify how firms should specify a product’s sustainability objectives and reflect these in the target market and negative target market assessments.

Further, in May 2026, ESMA published the results of a Common Supervisory Action, a coordinated review with national competent authorities, including the CSSF, assessing how 245 firms across 29 EU/EEA jurisdictions integrate sustainability into MiFID II suitability and product governance. It found implementation is real but uneven, with weaknesses in preference collection, product matching, and target market assessments. ESMA has asked NCAs for a proportionate, dialogue-based approach during the transition, while still enforcing clear breaches, and will use the findings to shape future updates to the MiFID II Delegated Acts and Guidelines.

MiFID II is the cornerstone of EU financial regulation. Its scope is broad, with requirements applying to a diverse range of entities active in financial markets, from trading venues to investment firms and asset managers.

The Delegated Regulation (EU) 2021/1253 impacts investment firms that provide investment advice and/or portfolio management services in the EU. They must assess the sustainability preferences of their clients in addition to the traditional suitability assessment.

The additional requirements significantly impact firms’ IT systems, internal processes, and procedures. In particular, investment firms must update their suitability questionnaire to collect and assess clients’ sustainability preferences. They must also amend their internal procedures to consider sustainability preferences in the selection process of the financial instruments being offered to clients.

The introduction of sustainability preferences led to the following main updates to the ESMA Guidelines:

Information to clients on sustainability preferences: Investment firms will need to help clients understand the concept of sustainability preferences and explain the difference between products with and without sustainability features in a clear manner, avoiding technical language;
Collection of information from clients on sustainability preferences: Investment firms will need to collect information from clients on their preferences about the different types of sustainable investment products and to what extent they want to invest in these products;
Assessment of sustainability preferences: Once an investment firm has identified a range of suitable products for a client, following the criteria of knowledge and experience, financial situation, and other investment objectives, the firm shall identify the product(s) that fulfil the client’s sustainability preferences;
Organisational requirements: Investment firms will need to give staff appropriate training on sustainability topics and keep appropriate records of the sustainability preferences of the client (if any) and any updates to these preferences.

In its Guidelines, ESMA specifies that a failure to meet a client’s sustainability preferences is not a blocking issue. Instead, where a firm cannot offer a product matching those preferences, it should inform the client and give them the opportunity to adapt their preferences. Buying or selling a financial instrument may still be treated as suitable if the standard suitability criteria (knowledge and experience, financial situation and investment objectives) are met and the client adapts their sustainability preferences, provided this adaptation relates only to that specific transaction, rather than to the client’s general profile, and is properly documented.

As part of the EU Sustainable Finance Action Plan released on 8 March 2018, the European Commission announced the intention that investment firms should incorporate sustainability factors as part of their duties towards clients and potential clients when providing financial advice and portfolio management services.

21 April 2021: Adoption of the Delegated Act 2021/1253.
02 August 2021: Publication of the Delegated Act 2021/1253 in the Official Journal of the European Union.
22 August 2021: Entry into force of the Delegated Act 2021/125.
02 August 2022: Application of the Delegated Act 2021/1253.
03 October 2023: Application of ESMA’s update of two sets of guidelines on suitability and product governance.
03 October 2023: ESMA announced that it will launch a common supervisory action (“CSA”) with national competent authorities (“NCAs”) on the integration of sustainability in credit institutions as well as investment firms’ MiFID II suitability assessment and product governance processes and procedures in 2024.
29 September 2025: Transposition deadline for the MiFID II Amending Directive (2024/790). Luxembourg met this deadline via the Law of 3 July 2025 (published 8 July 2025), which also transposed the ESAP and Listing Act Directives and implemented the MiFIR Amending Regulation (see “Adaptations at the Luxembourg level” above). ESMA published a first transition statement on 10 October 2025 and a second transition statement providing further guidance on the phased application of the revised rules.
04 December 2025: The European Commission published a legislative proposal known as the Market Integration Package to update MiFID II rules on investment services and regulated markets, with the aim to streamline cross-border investment services, enhance transparency in trading venues, and align MiFID II with broader EU market integration objectives. The package consists of a Master Regulation and a Master Directive, which will amend MiFID II and related frameworks, and a new Settlement Finality Regulation. Once adopted, the changes will be phased in over 12–24 months, with some rules applying immediately and transitional measures lasting up to five years. Key objectives include reducing market fragmentation, strengthening ESMA’s supervisory powers over major cross-border infrastructures, and supporting innovation such as DLT-based solutions (distributed ledger technology).
12 June 2026: Member States approved the EU Retail Investment Strategy (RIS), an omnibus package amending MiFID II, IDD, Solvency II, UCITS, AIFMD and PRIIPs. Key changes relevant to MiFID II include a new inducements test (Article 24a), value-for-money/peer-group assessment obligations, and harmonised cost disclosure. Formal publication in the Official Journal is expected in Q4 2026, after which Member States will have 24 months to transpose.

In depth

Deep dive into the key characteristics of the EU sustainable finance regulation