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The Sustainable Finance Package: Commission amends MiFID, UCITS and AIFM delegated acts to include sustainability considerations

  • Europe
  • Financial services and markets regulation
  • Financial services and markets regulation - ESG
  • Investment funds and asset management
  • Financial services - Asset managers and funds

14-05-2021

As part of its Sustainable Finance Package the European Commission has adopted various amending regulations to effect the integration of sustainability factors into:

  • organisational requirements and operating conditions for investment firms - MiFID Delegated Regulation
  • product governance obligations - MiFID Delegated Directive
  • UCITS - UCITS Delegated Directive
  • alternative investment fund managers - AIFM Regulation

MiFID Delegated Regulation

Commission Delegated Regulation amending Delegated Regulation (EU) 2017/565 effects the integration of sustainability factors, risks, and preferences into certain organisational requirements and operating conditions for investment firms (“Amended MiFID Delegated Regulation”).

The Amended MiFID Delegated Regulation forms a part of the Sustainable Finance Package adopted by the European Commission to facilitate the flow of capital towards sustainable activities across the European Union. Alongside Delegated Regulation (EU) 2017/565 (the “MiFID Delegated Regulation”), the Sustainable Finance Package amends five other delegated regulations and directives to ensure that financial firms including advisers, asset managers and insurers include sustainability considerations in their internal procedures, services and investment advice to clients.

Amendments

The Amended MiFID Delegated Regulation requires investment firms as defined in article 4(1)(1) Directive 2014/65/EU (“Investment Firms”) to include sustainability risks, factors and preferences in their policies and internal processes as well as in investment advice provided to clients. The amendments include:

  • importing definitions of “sustainability risks” and “sustainability factors” from article 2(22) and 2(24) of Regulation 2019/2088 on sustainability-related disclosures in the financial services sector (“SFDR”);
  • adding a definition of “sustainability preferences” meaning a client’s or potential client’s choice as to whether and to what extent to invest in financial instruments which:
    • invest in:
      • environmentally sustainable investments (as defined in Article 2(1) of Regulation (EU) 2020/852);
      • sustainable investments (as defined in Article 2(17) of the SFDR);
    • consider principal adverse impacts on sustainability factors;
  • a requirement for Investment Firms to consider sustainability risks when meeting the organisational requirements under Article 21(1) of the MiFID Delegated Regulation;
  • an obligation for Investment Firms to take into consideration sustainability risks in respect of:
    • establishing, implementing and maintaining risk management policies;
    • procedures identifying risks relating to the firm's activities, processes and systems;
    • setting the level of risk tolerated;
  • an obligation for Investment Firms to recognise sustainability preferences form part of the client’s interest when identifying conflicts of interest;
  • a requirement for Investment Firms to describe sustainability factors taken into consideration when selecting financial instruments to recommend in the information disclosed to the client when providing investment advice under article 52(3) of the MiFID Delegated Regulation;
  • a requirement for the Investment Firms to have a sufficient knowledge allowing to inform the client whether, in the course of providing portfolio management service, a specific transaction meets the client’s sustainability preferences, among other criteria listed in article 54(2) of the MiFID Delegated Regulation;
  • a requirement for the information about the investment objectives of the client or potential client in the Investment Firm’s to include sustainability preferences;
  • a requirement for Investment Firms to take into consideration sustainability factors when adopting and implementing policies and procedures to ensure that they understand the nature of investment services and financial instruments selected for their clients;
  • an obligation for Investment Firms not to recommend or trade financial instruments which do not meet the sustainability preferences of a client or potential clients, to record such decisions and inform clients and potential clients accordingly;
  • a requirement for Investment Firms to include in reports to retail clients an explanation of how investment advice meets the client’s sustainability preferences in the course of giving investment advice in accordance with article 54(1) of the MiFID Delegated Regulation;
  • a requirement to specify that requirements to meet sustainability preferences of clients or potential clients, where relevant, do not limit the obligation for Investment Firms to review the suitability of investment advice recommendations at least annually (or more frequently if the risk profile of the client and the type of financial instruments recommended so require) under article 54(13) of the MiFID Delegated Regulation.

MiFID Delegated Directive

Commission Delegated Directive amending Delegated Directive (EU) 2017/593 effects the integration of sustainability factors into product governance obligations (“Amended MiFID Delegated Directive”).

The Amended MiFID Delegated Directive forms a part of the Sustainable Finance Package adopted by the European Commission to facilitate the flow of capital towards sustainable activities across the European Union. Alongside Delegated Directive (EU) 2017/593 (“MiFID Delegated Directive”), the Sustainable Finance Package amends five other delegated regulations and directives to ensure that financial firms including advisers, asset managers and insurers include sustainability considerations in their internal procedures, services and investment advice to clients.

Amendments

The Amended MiFID Delegated Directive requires Investment Firms manufacturing financial instruments to include sustainability factors and sustainability-related objectives in their product oversight and governance processes. Amendments include:

  • importing the definition of “sustainability factors” from article 2(24) of the SFDR;
  • requirements for Investment Firms analysing a potential target market for a financial instrument in accordance with article 9(9) of the MiFID Delegated Directive to:
    • take into sustainability-related objectives when identifying clients for which such instrument could be suitable;
    • identify any group(s) of clients whose needs and objectives are not compatible with the financial instrument;
  • an obligation for Investment Firms to determine whether sustainability factors of a financial instrument are consistent with the target market;
  • an obligation for Investment Firms to provide distributors with:
    • sustainability factors presented in a transparent manner;
    • relevant information to permits them to consider the sustainability-related objectives of a client or a potential client;
  • a requirement for Investment Firms to consider whether a financial instrument remains consistent with sustainability-related objectives of the target market when reviewing financial instruments they manufacture under article 9(14) of the MiFID Delegated Directive;
  • a requirement for Investment Firms to ensure products and services offered are compatible with sustainability-related objectives of the relevant target market when complying with the requirement to have in place adequate product governance requirements under article 10(2) of the MiFID Delegated Directive;
  • a requirement for Investment Firms to consider whether an investment product or service remains consistent with sustainability-related objectives of the target market when reviewing investment products or services offered under article 10(5) of the MiFID Delegated Directive.

UCITS Delegated Directive

Commission Delegated Directive amending Directive 2010/43/EU effects the integration of sustainability risks and sustainability factors into the regulation of UCITS (“Amended UCITS Delegated Directive”).

The Amended UCITS Delegated Directive forms a part of the Sustainable Finance Package adopted by the European Commission to facilitate the flow of capital towards sustainable activities across the European Union. Alongside Directive 2010/43/EU (“UCITS Delegated Directive”), the Sustainable Finance Package amends five other delegated regulations and directives to ensure that financial firms including advisers, asset managers and insurers include sustainability considerations in their internal procedures, services and investment advice to clients.

Amendments

The Amended UCITS Delegated Directive obliges UCITS management companies (“Management Companies”) and, where applicable, investment companies without a designated management company (“Investment Companies”)1  to include sustainability considerations in their internal policies and processes and to UCITS under their management. The amendments include:

  • importing definitions of “sustainability risks” and “sustainability factors” from article 2(22) and 2(24) of the SFDR;
  • a new obligation for Management Companies to take into account sustainability risks when establishing, implementing or maintaining internal decision-making procedures under article 4(1)(a) of the UCITS Delegated Directive;
  • a new requirement for Management Companies to retain necessary resources and expertise for the effective integration of sustainability risks;
  • an obligation for Investment Companies to integrate sustainability risks in the management of UCITS;
  • an obligation for Management Companies to ensure senior management are responsible for the integration of sustainability risks in the activities referred to in article 9(2)(a)-(f) of the UCITS Delegated Directive including:
    • implementing a general investment policy;
    • overseeing investment strategies for managed UCITS;
    • reviewing internal and risk management procedures;
  • an obligation for Management Companies to include risks arising from the integration of sustainability risks in processes, systems, and internal control when identifying conflicts of interests that may damage interests of UCITS under their management;
  • a requirement for Management Companies and Investment Companies conducting due diligence on investments under article 23 of the UCITS Delegated Directive to consider sustainability risks.
  • a requirement for the Management Companies considering adverse impacts of investment decisions on sustainability factors at the entity level in accordance with article 4(1)(a), 4(3), or 4(4) of the SFDR to take into account principal adverse impacts considerations when conducting due diligence under article 23 of the UCITS Delegated Directive;
  • a requirement for Management Companies to include an assessment of sustainability risk in addition to factors listed in article 38(1) of the UCITS Delegated Directive when implementing risk management policies for UCITS they manage.

AIFM Regulation

Commission Delegated Regulation amending Delegated Regulation (EU) No 231/2013 effects the integration of sustainability risks and sustainability factors into the regulation of alternative investment fund managers (the “Amended AIFM Regulation”).

The Amended AIFM Regulation forms a part of the Sustainable Finance Package adopted by the European Commission to facilitate the flow of capital towards sustainable activities across the European Union. Alongside Delegated Regulation (EU) No 231/2013 (the “AIFM Regulation”), the Sustainable Finance Package amends five other delegated regulations and directives to ensure that financial firms including advisers, asset managers and insurers include sustainability considerations in their internal procedures, services and investment advice to clients.

Amendments

The Amended AIFM Regulation requires alternative investment fund managers (“AIFMs”) to include sustainability risks and factors in the policies and processes applied internally and to alternative investment funds (“AIFs”) under their management. Amendments include:

  • importing definitions of “sustainability risks” and “sustainability factors” from article 2(22) and 2(24) of the SFDR;
  • requirement for AIFMs to consider sustainability risks and where appropriate principal adverse impacts when conducting due diligence on investments under article 18 of the AIFM Regulation;
  • requirement for AIFMs to retain necessary resources and expertise for the effective integration of sustainability risks;
  • when AIFMs are identifying conflicts of interests which may damage interests of AIFs under their management, a requirement to include conflicts which may arise from the integration of sustainability risks in processes, systems, and internal control;
  • a requirement for AIFMs to ensure the risk management policies of AIFs under their management include assessment of sustainability risks;
  • a new obligation for AIFMs to take into account sustainability risks when establishing, implementing, or maintaining internal decision-making procedures under article 57(1)(a) of the AIFM Regulation;
  • a new obligation for AIFMs to ensure their senior management is responsible for the integration of sustainability risks in the activities referred to in article 60(2)(a)–(h) of the AIFM Regulation including:
    • implementing general investment policy;
    • overseeing investment strategies for managed AIFs;
    • establishment and implementation of valuation policies;
    • remuneration policy;
    • reviewing internal and risk management procedures.

Transposition and entry into force

The Amended MiFID Delegated Regulation and the Amended MiFID Delegated Regulation amending regulations will come into force 20 days following publication in the Official Journal of the European Union and will be applicable a year later.


  1. Article 2(2) of the UCITS Delegates Directive provides that provisions of Chapter I (article 1 to 3), article 12 of Chapter II and Chapters III, IV (articles from 17 to 29) and VI (articles from 39 to 45) shall apply mutatis mutandis to the Investment Companies.