On 8 June 2020, the European Commission (the "EC") published
six initiatives on sustainable finance in banking and financial services for feedback. The six draft acts will require the integration of sustainability risks and factors into the frameworks for the Undertakings for Collective Investment in Transferable Securities Directive (2009/65/EC) ("UCITS"), the Alternative Investment Fund Managers Directive (2011/61/EU) ("AIFMD"), the MiFID II Directive (2014/65/EU), in addition to the Solvency II Directive (2009/138/EC), and the Insurance Distribution Directive ((EU)/2016/97) ("IDD").
The draft Commission Delegated Regulations and Directives ("Draft Delegated Acts") contribute to the EU's wider initiative on sustainable development, which seek to place sustainability at the centre of the financial system and to support the transformation of Europe's economy into a greener, more resilient, and circular system.
The Draft Delegated Acts are based on a number of ESMA and EIOPA final reports on technical advice, which concluded that further clarification on the integration of sustainability risks and factors in the existing delegated acts was necessary.
In addition, the Draft Delegated Acts, which adapt rules on fiduciary duties and suitability tests, seek to reinforce the:
(a) Regulation on sustainability-related disclosures in the financial services sector ((EU) 2019/2088);
(b) Regulation on the EU Climate Transition Benchmarks and the EU Paris-aligned Benchmarks and sustainability-related disclosures for benchmarks ((EU) 2019/2089); and
(c) Regulation on the EU taxonomy for sustainable activities (not yet finalised).
Amendments to the Draft Delegated Acts
(a) Draft Commission Delegated Regulation Ares(2020)2955203 clarifies AIFMs' current obligations to integrate sustainability risks in addition to the implication of the Regulation on sustainability-related disclosures in the financial services sector, and in particular, where AIFMs disclose information in connection to the consideration of adverse sustainability impacts.
It also clarifies that sustainability risks are to be reflected in AIFMs' processes, systems and controls and that the AIFM shall retain the necessary resources and expertise for the effective integration of those risks. In addition, under the Regulation on sustainability-related disclosures in the financial services sector, AIFMs are obliged to consider the principal adverse impacts of investment decisions on sustainability factors, or consider those principal adverse impacts voluntarily, and are obliged to disclose how their due diligence policies take those principal adverse impacts into account.
Further, to maintain a high standard of investor protection, this draft delegated regulation states that AIFMs should, when identifying the types of conflict of interest the existence of which may damage the interests of an AIF, include conflicts of interest that may arise as a result of the integration of sustainability risks in their processes, systems and internal control. For example, this could include conflicts arising from remuneration or personal transactions of relevant staff, those that could give rise to greenwashing, mis-selling or misrepresentation of investment strategies and conflicts of interest between different AIFs managed by the same AIFM.
Under this delegated regulation, the risk management policy will be required to take account of sustainability risks and senior management will be responsible for the integration of those risks.
(b) Draft Commission Delegated Regulation Ares(2020)2955205 integrates sustainability factors into both the suitability assessment under the existing MiFID II framework and into organisational requirements.
(c) Draft Commission Delegated Directive Ares(2020)2955234 clarifies that as part of the product oversight and governance process, sustainability factors and preferences should be considered within the product governance requirements in Delegated Directive (EU) 2017/593. Investment firms that manufacture and distribute financial instruments should take these sustainability factors into account in the product approval process of each financial instrument. This also applies to product governance and oversight arrangements for every financial instrument intended to be distributed to clients seeking financial instruments with a sustainability-related profile. A general statement that a financial instrument has a sustainability-related profile should not be sufficient and with regard to clients who possess specific sustainability preferences, it should be specified by the investment firms manufacturing and distributing the respective financial instruments.
(d) Draft Commission Delegated Directive Ares(2020)2955256 clarifies the requirements for management companies on the integration of sustainability risks and matters. In this regard, "Article 5a Obligation for investment companies to integrate sustainability risks in the management of UCITS" is inserted. Further, it seeks to clarify the current obligation of UCITS to integrate sustainability risks and the implications of the Regulation on sustainability-related disclosures in the financial services sector, in particular, where UCITS management companies disclose information on the consideration of adverse sustainability impacts.
(e) Draft Commission Delegated Regulation Ares(2020)2955224 requires sustainability risks be reflected by insurance and reinsurance undertakings in their governance systems and the assessment of their overall solvency needs, as well as their risk management systems and remuneration policies.
It also introduces the integration of sustainability risks into the prudent person principle.
(f) Draft Commission Delegated Regulation Ares (2020) 2955230 integrates sustainability factors and preferences into the product oversight and governance requirements for insurance undertakings and insurance distributors and into the rules on conduct of business and investment advice for insurance-based investment products.
The EC's feedback period runs from 8 June 2020 to 6 July 2020. Once closed, the EC will adopt the act. In general, Parliament and Council have two months to formulate any objections. Where there are none, the Draft Delegated Acts will enter into force on the twentieth day following their publication in the Official Journal of the EU. They will become applicable 12 months after publication.
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