ESMA consultations on integrating sustainability risks and factors in MiFID II, AIFMD and the UCITS Directive

The European Securities and Markets Authority (“ESMA”) launched two public consultations to seek input on its draft technical advice for the integration of sustainability risks and factors. ESMA will consider the responses it receives to the consultation papers and will finalise the draft technical advice for submission to the European Commission by end of April 2019. 

What it is about

The European Securities and Markets Authority (“ESMA”) launched on 19 December 2018 three public consultations to seek input on

1. its draft technical advice for the integration of sustainability risks and factors into 
   • the Markets in Financial Instruments Directive II (“MiFID II”) as regards securities trading, and 
   • the Alternative Investment Fund Managers Directive (“AIFMD”) and the Undertakings in Collective Investment in Transferable Securities (“UCITS”) Directive as regards investment funds, as well as on
2. credit rating agency (“CRA”) guidelines aimed at improving the quality and consistency of disclosures of environmental, social and governance (“ESG”) factors when considered as part of a credit rating action.

Consultation on integrating sustainability risks and factors in MiFID II

ESMA is proposing changes in the following areas of the MiFID II framework:

• General organisational requirements: where environmental, social and governance (“ESG”) considerations are relevant for the provision of investment services to clients, firms should take them into account when complying with the organisational requirements.
• Risk management: explicit inclusion of sustainability risks when establishing, implementing and maintaining adequate and documented risk management policies and procedures.
• Conflicts of interest: consideration of the types of conflicts of interest arising in relation to the integration of sustainability risks and factors.
• Product Governance: both the manufacturer and distributor should take into account ESG preferences or ESG considerations while identifying the target markets for the financial instruments they manufacture or distribute.
• Suitability: firms are expected to (i) take into account ESG preferences in the context of assessing client’s investment objectives and (ii) to consider ESG factors in the context of product classification.

The respective ESMA consultation paper can be found here.

Consultation on integrating sustainability risks and factors in the UCITS Directive and AIFMD

ESMA is proposing changes in the following areas of the UCITS and AIFMD framework:

• General organisational requirements: incorporation of sustainability risks within organisational procedures, systems and controls to ensure that they are properly taken into account in the investment and risk management processes.
• Resources: consideration of the required resources and expertise for the integration of sustainability risks.
• Senior Management responsibilities: clarification that the integration of sustainability risks is part of the responsibilities of Senior Management.
• Conflicts of interest: consideration of the types of conflicts of interest arising in relation to the integration of sustainability risks and factors.
• Due diligence requirements: consideration of sustainability risks when selecting and monitoring investments, designing written policies and procedures on due diligence and implementing effective arrangements.
• Risk management: explicit inclusion of sustainability risks when establishing, implementing and maintaining an adequate and documented risk management policy.

The respective ESMA consultation paper can be found here.

Consultation on disclosure requirements applicable to credit ratings

ESMA is proposing guidelines to improve:

• the quality and consistency of the information that is disclosed alongside the issuance of a credit rating in a publicly available press release.
• the transparency of credit rating press releases concerning the extent to which sustainability factors have been considered as part of a credit rating. 

The respective ESMA consultation paper can be found here.