Advice on sustainable finance ESMA to European Commission

On 3 May 2019 ESMA has published its technical advice to the European Commission (EC) on the integration of sustainability risks and factors relating to “ESG” (Environmental, Social and Governance) considerations with regards to investment firms and investment funds into (i) MiFID II and (ii) the AIFMD and UCITS Directive. ESMA’s advice supports the EC’s Action Plan: Financing Sustainable Growth. Click here for the advice on MiFID II and here for the advice on the AIFMD and UCITS Directive. For ESMA’s press release click here.

Proposed amendments to the MiFID II delegated acts include the following requirements for investment firms:
• take into account ESG considerations where they are relevant for the provision of investment services to clients when complying with organisational requirements,
• take into account sustainability risk within their risk management policies and procedures,
• when identifying the types of conflicts of interest whose existence may damage the interests of a client, include those that may stem from the distribution of sustainable investments,
• when identifying the target market for financial instruments, specifying the type(s) of client for whose ESG preferences (where relevant) an instrument is compatible and, when reviewing the instrument, consider if it remains consistent with the ESG preferences (where relevant) of the target market.

Proposed amendments to the UCITS and AIFMD Level 2 frameworks include the following requirements for management companies and AIFMs:
• take into account sustainability risks when complying with general organisational requirements,
• take into account the necessary resources and expertise for the effective integration of sustainability risks,
• ensure that its senior management is responsible for the integration of sustainability risks,
• when identifying the types of conflicts of interest whose existence may damage the interests of a UCITS/an AIF or its investors, include those that may arise in relation to the integration of sustainability risks,
• take into account sustainability risks and, where applicable, the principal adverse impact of investment decisions on sustainability factors when complying with due diligence requirements,
• include in the risk management policy such procedures as are necessary to enable the management company/AIFM to assess for each UCITS/AIF it manages the exposure of that UCITS/AIF to (among other things) sustainability risks.

It is now up to the EC to adopt the updated delegated acts. Once adopted by the EC, the delegated acts will enter into force after their publication in the Official Journal, unless the European Parliament and the Council object to them.