On 21 April 2021, the Commission adopted an 'ambitious and comprehensive' package of measures pursuant to the EU Sustainable Finance Action Plan.
The Commission's package includes legislative measures amending the UCITS IV Directive 2010/43 and the AIFMD Delegated Regulation 231/2013 (the Amending Delegated Legislation).
The Commission-adopted Amending Delegated Legislation materially reflects ESMA's technical advice to the Commission in its Final Report, dated April 2019, on Integrating Sustainability Risk in the UCITS Directive and AIFMD and the form of Amending Delegate Legislation tabled for consultation by the Commission last July.
The Amending Delegated Legislation form part of the EU Sustainable Finance Action Plan (the Action Plan) and along with the Sustainable Finance Disclosures Regulation and the Taxonomy are the key measures under the Action Plan which impact fund management companies. For further details, see our July 2020 briefing Green Rules for Every Colour Fund.
New Sustainability Requirements for UCITS managers and AIFMs
The Amending Delegated Legislation oblige UCITS managers and AIFMs (Fund Managers) to assess the risks to fund returns arising from environmental, social or governance matters (Sustainability Risks). The form of assessment of Sustainability Risks adopted by Fund Managers must be reflected in the Fund Managers' policies and procedures, as adopted pursuant to applicable rules under the relevant governing regime.
Under the Amending Delegated Legislation, Fund Managers are required to adapt existing organisational structures to:
- provide for the assessment of Sustainability Risks when complying with the general organisational and procedural requirements;
- ensure the necessary level of resources and expertise are retained for the effective assessment of Sustainability Risks;
- ensure that senior management is responsible for the assessment of Sustainability Risks;
- incorporate assessment of fund exposure to Sustainability Risks in the risk management framework;
- assess and identify any conflicts of interest that may arise in relation to the assessment of Sustainability Risks and whose existence may damage the interests of an underlying fund. The identification process could include, for example, conflicts that could give rise to greenwashing, misselling, misrepresentation of investment strategies or churning. Consideration may also be given to conflicting interests between funds with different investment strategies managed by the same Fund Manager as well as situations where there are other business relationships with investee entities/issuers, conflicting group interests or investments in entities with close links in similar circumstances;
- where applicable, Fund Managers who elect/are obliged under the Action Plan to disclose the impact of their investment decisions on sustainability factors (environmental, social and employee factors, respect for human rights, anti-corruption and anti-bribery matters) must take into account, any identified adverse impacts, when complying with their existing investment due diligence obligations under their governing regime.
The Amending Delegated Legislation must now complete the EU legislative process, following which the provisions are expected to be applicable from October 2022.
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.