On 8 June 2020, the European Commission published a draft Commission Delegated Regulation amending Delegated Regulation (EU) No 231/2013 as regards sustainability risks and sustainability factors to be taken into account by alternative Investment fund managers (the “Draft Amendment”).
The Draft Amendment is part of the Action Plan for Financing Sustainable Growth announced in 2018 and aims to integrate sustainability risks and clarifies implications of Regulation (EU) 2019/2088 on sustainability-related disclosures in the financial services sector where AIFMs disclose information with regard to the consideration of adverse sustainability impacts (the “Sustainability Disclosures Regulation”- please refer to BSP Sustainable Finance Insights Series for a detailed analysis).
The Draft Amendment proposes changes to the Commission Delegated Regulation (EU) No 231/2013 supplementing Directive 2011/61/EU (the “AIFM Regulation”), introducing sustainability factors inter alia to risk management and conflict of interest policies as well as due diligence procedures of the AIFMs.
It includes the following amendments:
- introduction of a definition of “sustainability risks” which will have the same meaning as the definition in article 2(22) of the Sustainability Disclosures Regulation – “an environmental, social or governance event or condition that, which if it occurs, could cause an actual or a potential material negative impact on the value of the investment”;
- introduction of a definition of “sustainability factors” which will have the same meaning as the definition in article 2(24) of the Sustainability Disclosures Regulation – “environmental, social and employee matters, respect for human rights, anti‐corruption and anti‐bribery matters”;
- a new requirement for alternative investment fund managers (the “AIFMs”) to consider sustainability risks when conducting due diligence on investments pursuant to article 18 of the AIFM Regulation. Where the AIFMs are in the scope of the obligation to consider adverse impacts of investment decisions on sustainability factors as described in article 4(1)(a) of the Sustainability Disclosures Regulation, the AIFMs will be also required to take into account such principal adverse impacts when conducting due diligence under art 18,1.-3. of the AIFM Regulation;
- a new requirement for an AIFM to retain necessary resources and expertise for the effective integration of sustainability risks alongside the obligation to employ sufficient personnel pursuant to article 22 of the AIFM Regulation;
- a new obligation for an AIFM when identifying conflicts of interests that may damage alternative investment funds (the “AIFs”) it manages, to include those that may arise from the integration of sustainability risks in processes, systems, and internal control.
- amendment of 40(2) of the AIFM Regulation to now provide that the risk management policy shall comprise of “such procedures as are necessary to enable the AIFM to assess for each AIF it manages the exposure of that AIF to market, liquidity, sustainability, and counterparty risks, and the exposure of the AIF to all other relevant risks, including operational risks, which may be material for each AIF it manages”;
- a new obligation for an AIFM to take into account sustainability risks when complying with general rules for organisational requirements laid down in article 57(1) of the AIFM Regulation;
- a new obligation for an AIFM to ensure that its senior management is responsible for the integration of sustainability risks in the activities referred to in article 60(2)(a) – 60(2)(h) of the AIFM Regulation which includes, among others, implementation and verification of investment policy and strategy for each managed AIF, ensuring valuation policies or establishing and applying a remuneration policy.
The Draft Amendment is currently open for public consultation allowing stakeholders to give their feedback until 6 July 2020.
Once adopted, the Draft Amendment will enter into force on the twentieth day following publication in the Official Journal of the European Union and will be binding and directly applicable in all Member States.