On 8 June 2020, the European Commission published a draft Commission Delegated Directive amending Directive 2010/43/EU as regards the sustainability risks and sustainability factors to be taken into account for undertakings for collective investment in transferable securities (the “Draft Amendment”).
The Draft Amendment is part of the Action Plan for Financing Sustainable Growth announced by the European Commission 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 (the “Sustainability Disclosures Regulation”- please refer to BSP Sustainable Finance Insights Series for a detailed analysis).The obligation of undertakings for collective investment in transferable securities to integrate sustainability risks is particularly important where management companies of undertakings for collective investment in transferable securities disclose information with regard to the consideration of adverse sustainability impacts.
The Draft Amendment proposes changes to the Commission Delegated Directive 2010/43/EU implementing Directive 2009/65/EC (the “UCITS Implementing Directive”), introducing sustainability factors inter alia to risk management and conflict of interest policies as well as due diligence procedures of the management companies (the “ManCos”) managing undertakings for collective investment in transferable securities (“UCITS”).
The amendments include the following:
- 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 obligation for the ManCos to take into account sustainability risks when complying with rules for organisational requirements laid down in article 4(1) of the UCITS Implementing Directive;
- a new requirement for the ManCos to retain necessary resources and expertise for the effective integration of sustainability risks alongside with other obligations for resources pursuant to article 5 of the UCITS Implementing Directive;
- a new obligation for ManCos to integrate sustainability risks in the management of UCITS, taking into account the nature, scale and complexity of the business;
- a new obligation for a ManCo to ensure that its senior management is responsible for the integration of sustainability risks in their activities referred to in article 9(2)(a) – 9(2)(f) of the UCITS Implementing Directive;
- a new obligation for a ManCo when identifying conflicts of interests that may damage UCITS it manages, include those that may arise from the integration of sustainability risks in their processes, systems, and internal control;
- a new requirement for ManCos to consider sustainability risks when conducting due diligence pursuant to article 23 of the UCITS Implementing Directive. Where the ManCos 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 ManCos will be also required to take into account such principal adverse effects when conducting due diligence under art 23(1)-(4) of the UCITS Implementing Directive;
- a replacement of the definition of risk management policy in article 38(1) of the UCITS Implementing Directive to provide that it shall comprise “such procedures as are necessary to enable the ManCo to assess for each UCITS it manages the exposure of that UCITS to market, liquidity, sustainability, and counterparty risks, and the exposure of the UCITS to all other relevant risks, including operational risks, which may be material for each UCITS it manages”;
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. The Draft Amendment will necessitate in transposition into national law.