Part 1 of this advisory series provides an overview of the key provisions of the Disclosures Regulation1 . Part 2 in this series considers the BMR Amendment2 . Part 3 in this series looks at the key provisions of the Taxonomy Regulation3 and this Part sets out the proposed amendments to the legislation governing UCITS and AIFMs.
On 8 June 2020, the European Commission published draft delegated acts relating to amendments to legislation governing UCITS; AIFMs; insurers; and investment firms and advisers. These proposed amendments seek to clarify how sustainability risks and other sustainability factors can be integrated into the organisational, operational and risk management processes of these entities. This advisory focuses on the proposed amendments introduced for UCITS and AIFMs4 . Separately we have prepared tables which detail the specific amendments proposed to the UCITS Directive and the AIFM Level 2 Regulations.
The amendments proposed to both regimes are broadly similar and fall under the following headings:
Two new definitions "sustainability risk" and "sustainability factors" are proposed. These new definitions take their meanings from the Disclosures Regulation and are:
- "sustainability risk" means an environmental, social or governance event or condition that, if it occurs, could cause an actual or a potential material negative impact on the value of the investment; and
- "sustainability factors" mean environmental, social and employee matters, respect for human rights, anti-corruption and anti- bribery matters
UCITS management companies and AIFMs will be required to take into account sustainability risks when complying with the operational and procedural requirements set out in Article 4(1) of the UCITS Directive and Article 57(1) of the AIFM Level 2 Regulations respectively once these proposals are in force.
UCITS management companies and AIFMs will be required to retain the necessary resources and expertise for the effective integration of sustainability risks.
Control by senior management
Senior management of UCITS management companies and AIFMs will be responsible for the integration of sustainability risks in the activities detailed in Article 9(2) of the UCITS Directive and Article 60(2) of the AIFM Level 2 Regulations of the AIFM Level 2 Regulations respectively.
Conflicts of interest
When UCITS management companies and AIFMs identify types of conflicts of interest that may damage the interests of the relevant fund, they are required to include those types of conflict of interest that may arise as a result of the integration of sustainability risks in their processes, systems and internal controls.
As part of their investment due diligence processes, UCITS management companies and AIFMs are required to take sustainability risks into account. Where UCITS management companies, UCITS investment companies (where applicable) and AIFMs consider principal adverse impacts of investment decisions on sustainability factors as described in the Disclosures Regulation, those entities shall take into account such principal adverse impacts when complying with their due diligence requirements.
Risk management policy
The existing provisions in the UCITS Directive and the AIFM Level 2 Regulations relating to the composition of the risk management policy will be amended to include reference to sustainability risk as one of the types of risks to be assessed and for which procedures need to be included in the relevant risk management policy.
Additional UCITS provision
As the definition of UCITS management company in the UCITS Directive does not include self-managed investment companies an additional provision placing obligations on investment companies to integrate sustainability risks in the management of the UCITS is proposed. This proposal is being introduced to ensure that there is not an uneven playing field between UCITS management companies and self-managed investment companies in relation to integrating sustainability risks although the provision relating to investment companies does provide that the nature, scale and complexity of the business of the investment companies can be taken into account.
This is not relevant in the context of alternative investment funds as the definition of AIFM in the Alternative Investment Fund Managers Directive5 includes self-managed funds.
A consultation period in respect of the draft delegated acts will end on 6 July 2020. Once the delegated acts are finalised and published in the official journal of the European Union (the " Official Journal") as a delegated directive the UCITS legislation will be required to be transposed by individual member states at the latest on the last day of the eleventh month after publication in the Official Journal. The measures set out in the implementing legislation will apply from the first day of the twelfth month after publication in the Official Journal.
The proposed amendments to the AIFM Level 2 Regulations are directly effective in member states and as such do not require implementing legislation to be prepared. The measures set out in the delegated regulation will apply from the first day of the twelfth month after publication in the Official Journal.
1. Regulation (EU) 2019/2088.
2. Regulation (EU) 2019/2089.
3. Regulation (EU) 2020/852.
4. For UCITS, a draft Commission Delegated Directive amending Directive 2010/43/EU (the "UCITS Directive") as regards the sustainability risks and sustainability factors to be taken into account for UCITS and for AIFMs, Commission Delegated Regulation amending Delegated Regulation (EU) No 231/2013 (the "AIFM Level 2 Regulations") as regards sustainability risks and sustainability factors to be taken into account by AIFM.
5. Directive 2011/61/EU.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.