Sustainable Finance: MiFID II, AIFMD and UCITS Directive

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Sustainable Finance: ESMA publishes technical advice on the integration of sustainability risks and factors in MiFID II, AIFMD and UCITS Directive

7 May 2019

Regulatory News Alert

Context and objectives

Since the Paris Climate Agreement, concluded by the European Union (EU) in 2015 and formally adopted in 2016, sustainability forms an integral part of the European Commission (EC)’s work.

According to the EU Action Plan on Financing Sustainable Growth from May 2018, one of the major goals of the EC is to clarify fiduciary duties and to increase transparency on sustainability risks and investment opportunities. The purpose is to achieve sustainable and inclusive growth by reorienting capital flows towards sustainable investments, fostering long-termism in financial activity and actively managing the financial risks stemming from climate change. 

Following a formal request by the EC, the European Securities and Markets Authority (ESMA) has now provided technical advice on how to integrate these sustainability risks and factors in key regulatory texts, more precisely:

  • The Markets in Financial Instruments Directive II (MiFID II)
  • The Alternative Investment Fund Managers Directive (AIFMD)
  • The Undertakings in Collective Investment in Transferable Securities (UCITS) Directive
PDF - 69kb

Amendments suggested by ESMA

To integrate the topic of sustainability in the European financial services regulations, ESMA considers minor changes to the regulation as sufficient. Yet, financial institutions and investment companies should not misinterpret this advice: the minor changes suggested by ESMA may have a large impact on their daily operations and organizational set-up.

Concerning MiFID II, the ESMA proposes to require investment firms to:

  • Take into account Environmental, Social and Governance (ESG) considerations when complying with the existing organizational requirements
  • Consider sustainability risks in their risk management policies and procedures
  • Identify conflicts of interest that may stem from the distribution of sustainable investments
  • Set-up appropriate arrangements to ensure that the inclusion of ESG considerations in the advisory process and portfolio management does not lead to misselling practices
  • Ensure that their compliance function, internal audit function, management body and senior management consider aspects related to sustainability risk in their respective duties

In addition, in both the AIFMD and the UCITS Directive, amendments with regard to the following are proposed:

  • General requirements on procedures and organization, i.e. management companies should take into account sustainability risks in their decision-making procedures and organizational structure
  • Resources, i.e. management companies will need to consider the necessary resources and expertise for the effective integration of sustainability risks
  • Control by senior management, i.e. the senior management should assume overall responsibility for the integration of sustainability risks

These might inevitably have an organizational impact on the fund management and governance structure.

As a next step, ESMA intends to cooperate closely with the EC to transform the technical advice into formal delegated acts. Given the forthcoming EU elections, this might take a bit more time than usual, but overall we can expect that the year 2021 will be the ESG year with the formal application of several regulatory requirements.

How can Deloitte help?

Deloitte’s advisory specialists and dedicated services will help you design and implement your business strategy in light of the future evolution of the regulatory framework and market trends.

Via our Regulatory Watch Kaleidoscope service, Deloitte can also help you stay ahead of the regulatory curve to better manage and plan upcoming regulations.

Contacts

Pascal Martino
Partner – Banking Leader
Tel : +352 45145 2119
pamartino@deloitte.lu

Simon Ramos
Partner – IM Advisory & Consulting Leader
Tel : +352 45145 2702
siramos@deloitte.lu

Benoit Sauvage
Director – RegWatch, Strategy & Consulting
Tel : +352 45145 4220
bsauvage@deloitte.lu

Julie Castiaux
Senior Manager – Sustainability Expert
Tel : +352 45145 3648
jucastiaux@deloitte.lu

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