ESMA consultation on integration of sustainability risks and ESG factors in UCITS/ AIFM Directives

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ESMA consultation on integration of sustainability risks and ESG factors in UCITS/AIFM Directives

2 January 2019

Regulatory News Alert

Context and objectives

In July 2018, the European Commission invited ESMA to provide technical advice on how to amend the UCITS Directive (2009/65/EC) and AIFMD (2011/61/EU) to integrate sustainability risks and sustainability factors into the two regimes. On 19th December 2018, ESMA issued a consultation paper with its proposals.

The paper focusses on Environmental, Social and good Governance (ESG) considerations. The draft advice and proposed guidelines touch upon organisational requirements, operating conditions, risk management, conflicts of interest, product governance and disclosure requirements.

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Integrating sustainability risks and factors in the UCITS Directive and AIFMD

The proposals reflects on a series of high-level principles based on both directives aiming at meeting the European Commission's objective of integrating ESG factors and sustainability risks into investment decision processes.

ESMA explains that "sustainability risk" can be considered as "the risk of fluctuation in the value of positions in a fund’s portfolio due to ESG factors". It cites ESG factors as follows:

1. Environmental: issues relate to the quality and functioning of the natural environment and natural systems;
2. Social: issues relate to the rights, well-being and interests of people and communities; and
3. Governance: issues relate to the governance of companies and other investee entities.

ESMA's proposal aims to clarify that all authorised fund managers subject to the UCITS and AIFMD regimes need to incorporate ESG/sustainability risks in their due diligence processes and assess and manage the sustainability risks stemming from their investments along with all other relevant risks such as market, interest or credit risk. To this end, sustainability risks need to be captured by the due diligence process and risk management systems in a way and to the extent that is appropriate in relation to the size, nature, scope and complexity of their activities and the relevant investment strategies pursued

Specifically, ESMA is proposing changes within the six following areas of the UCITS and AIFMD framework:

  • General organizational requirements: incorporation of sustainability risks within organizational procedures, systems and controls to ensure that they are properly taken into account in the investment and risk management processes.
  • Resources: consideration of the required resources and expertise for the integration of sustainability risks.
  • Senior Management responsibilities: clarification that the integration of sustainability risks is part of the responsibilities of Senior Management.
  • Conflicts of interest: consideration of the types of conflicts of interest that can arise in relation to the integration of sustainability risks and factors.
  • Due diligence requirements: consideration of sustainability risks when selecting and monitoring investments, designing written policies and procedures on due diligence and implementing effective arrangements.
  • Risk management: explicit inclusion of sustainability risks when establishing, implementing and maintaining an adequate and documented risk management policy.

Next steps

The consultation will close on 19 February 2019. ESMA aims to provide the requested technical advice to the European Commission on the integration of sustainability risks and factors in the UCITS Directive and AIFMD Directive by 30 April 2019.

Although ESMA will hold an open hearing on 4 February 2019 and will use the consultation feedback to finalize its draft advice, it could be expected that large parts of the elements submitted to consultations will remain in the final text.

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Contacts

Benjamin Collette
Partner – Strategy, Clients & Industries Leader
Tel: +352 45145 2809
bcollette@deloitte.lu

Vincent Gouverneur
Partner – EMEA Investment Management Leader
Tel: +352 45145 2451
vgouverneur@deloitte.lu

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

Julie van Cleemput
Director – Strategy & Regulatory Consulting
Tel: +352 45145 2989
jvancleemput@deloitte.lu

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

 

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