On the 2nd August 2021, the EU Official Journal published several amending measures requiring EU Alternative Investment Fund Managers, EU UCITS management companies and EU MiFID investment firms (including portfolio managers and adviser/arrangers) to integrate sustainability risk management into their policies and procedures.
Take-aways for Fund Managers:
- AIFMs, UCITS management companies and self-managed UCITS will need to update their risk management policies to include procedures and processes that enable them to identify, assess and manage their exposure to sustainability risks.
Under the Sustainable Finance Disclosure Regulation (SFDR), “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 an investment. For example, if a Fund invests in the petroleum sector and there is an oil tanker accident resulting into an oil spill creating an environmental disaster, this could have an adverse effect on the share prices of petroleum companies thus lowing the value of the Fund’s investment. Prior to their subscription, potential investors should be aware of the markets risks involved but equally importantly of the environmental risks!
- In addition, such companies shall take into account sustainability risks in their decision-making processes and organisational structure, when establishing internal controls, compliance measures and internal reporting.
- Conflict of Interest Policies shall also be amended to include conflicts that may arise as a result of the integration of sustainability risks in their processes, systems and internal controls.
- Senior Management will need to consider the extent of their responsibilities in integrating the sustainability risk in the day-to-day management of their AIFM or UCITS management company.
- Compliance with these requirements should be assessed within each AIFM’s and UCITS’ existing risk management and governance framework and should be aligned with the AIFM’s or UCITS’ analysis for compliance with disclosures under the Sustainable Finance Disclosures Regulation (SFDR).
Take-aways for Investment Firms:
- MiFID II Investment firms providing portfolio management or financial advice shall obtain information from their clients regarding their sustainability preferences so that, when providing advice or portfolio management services, they have a reasonable basis that the investments recommended or made comply with those preferences.
- Investment firms will also need to take into account sustainability risks when complying with the MiFID II organisational requirements, when establishing, implementing and maintaining risk management policies and when identifying the types of conflict that arise in the course of providing investment and ancillary services and whose existence may damage the interests of a client.
- Investment firms manufacturing and distributing financial instruments will need to consider sustainability risk factors in the product approval process of each financial instrument and in the product governance and oversight arrangements for each financial instrument that is intended to be distributed to clients seeking financial instruments with a sustainability related profile.
Links to the various amending measures:
- Commission Delegated Regulation (EU) 2021/1255 amending Delegated Regulation (EU) 231/2013 (the AIFMD Delegated Regulation) as regards the sustainability risks and sustainability factors to be taken into account by Alternative Investment Fund Managers;
- Commission Delegated Regulation (EU) 2021/1253 amending Delegated Regulation (EU) 2017/565 (the MiFID Org Regulation) as regards the integration of sustainability factors, risks and preferences into certain organisational requirements and operating conditions for investment firms;
- Commission Delegated Regulation (EU) 2021/1254 correcting Delegated Regulation (EU) 2017/565 (the MiFID Org Regulation) as regards the integration of sustainability factors, risks and preferences into certain organisational requirements and operating conditions for investment firms and defined terms for the purposes of MiFID II;
- Commission Delegated Directive (EU) 2021/1270 amending Directive 2010/43/EU (the UCITS Implementing Directive) as regards the sustainability risks and sustainability factors to be taken into account for Undertakings for Collective Investment in Transferable Securities (UCITS).
The above-mentioned Delegated Regulations and Directive will apply from 2nd August 2022.
We currently organise in-house training seminars on SFDR and the measures outlined above.
Feel free to contact us for further information or assistance in assessing the impact of these EU measures to your firm.
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