Environmental, Social and Governance

The EU Disclosures Regulation

The EU Regulation on sustainability-related disclosures in the financial services sector (the EU Disclosures Regulation) forms part of a broader package of legislation being introduced by the European Commission as part of its Action Plan on Sustainable Finance. The EU Disclosures Regulation is the framework upon which regulatory technical standards (RTS) will be established and it outlines how the investment funds industry will need consider the information it discloses to investors in relation to sustainability and ESG. Listen to an audio summary of the EU Disclosures Regulation or read our detailed insight on the ALG website.

ESA consultation on ESG disclosure rules

As reported in our April 2020 bulletin, the ESAs issued a Consultation Paper on proposed harmonised ESG disclosure standards for financial market participants, financial advisers and financial products. UCITS managers, UCITS and AIFMs are financial market participants. UCITS and AIFs are financial products. The consultation contains draft RTS on the content, methodologies and presentation of each disclosure. It also contains background analysis of the issues and challenges that were addressed in preparing the consultation. The consultation closes on 1 September 2020. Listen to an audio summary of this consultation or read our detailed insight on the ALG website.

Read also our updated In Focus paper on ESG-related policy, regulatory and legislative developments at EU level and their relevance for the asset management and investment funds sector.

Liquidity risks in investment funds and the use of liquidity management tools

The European Systemic Risk Board (ESRB) published a recommendation on liquidity risks in investment funds. The ESRB recommends the European Securities and Markets Authority (ESMA) to:

  • co-ordinate with the National Competent Authorities (NCAs) to undertake a focused piece of supervisory work with investment funds that have significant exposures to corporate debt and real estate assets. The objective will be to assess the preparedness of these two segments to potential future adverse shocks, including any potential resumption of significant redemptions or an increase in valuation uncertainty while also considering any steps that could enhance preparedness
  • report to the ESRB on its analysis and on the conclusions reached regarding the preparedness of the relevant investment funds

ESMA must communicate its response to the recommendation to the European Parliament, the Council of the EU, the European Commission and the ESRB by 31 October 2020.

The ESRB also published a statement in which it emphasises the importance of the availability and timely use of liquidity management tools as a key element of prudent liquidity risk management by investment funds with exposures to less liquid assets. The ESRB noted the need to progress implementation of its 2017 recommendation on leverage and liquidity in investment funds, which would make various liquidity management tools available to fund managers to help them deal with redemption pressures when market liquidity is low.

ESMA published a statement expressing its support for the ESRB recommendation and statement. ESMA pointed out that, in response to COVID-19, it has intensified the exchange of information among NCAs on the use of liquidity management tools by EU/EEA UCITS and AIFs. It also referred to its recent launch of a common supervisory action with NCAs on UCITS liquidity risk management.

The ESRB noted that the sharp fall in asset prices observed at the onset of the COVID-19 pandemic was accompanied by significant redemptions from certain investment funds and a significant deterioration in financial market liquidity. It also noted that market conditions have subsequently stabilised.

ESMA referenced the high volatility and inherent valuation issues triggered by the pandemic, which led to large market corrections and a deterioration of liquidity risks. While the financial system has broadly been able to cope with this stress thus far, in part due to the actions of central banks and regulators around the world, it is prudent to assess the preparedness of the investment fund sector to further liquidity stress episodes.

COVID-19: ESMA statement on half-yearly financial reporting

ESMA has called for transparency on COVID-19 effects in half-yearly financial reports and set out recommendations. ESMA's statement is also relevant to financial reporting in other interim periods where IAS 34 is applied. ESMA notes that in the current situation some issuers may choose to publish their half-yearly financial reports later than usual (within the permitted period) but highlights that reports must not be unduly delayed. Issuers must still comply with their ongoing obligations under the Market Abuse Regulation.

ESMA addresses the application of IAS 34 to interim financial statements, highlighting the importance of updating the information included in an issuer's latest annual accounts to ensure that stakeholders are adequately informed of the impact of COVID-19. The statement also sets out specific guidance on the preparation of half-yearly financial statements and recommendations on disclosures it expects issuers to include in their interim management reports. ESMA encourages audit committees to enhance their oversight role and states that ESMA and NCAs will monitor and supervise the application of the relevant IFRS requirements and other provisions.

ESMA consultation on guidelines on outsourcing to cloud service providers.

ESMA published a consultation paper on guidelines on outsourcing to cloud service providers. The guidelines aim to provide guidance on the outsourcing requirements applicable to financial market participants when they outsource to cloud service providers. In particular, they aim to help firms and competent authorities identify, address and monitor the risks and challenges that arise from cloud outsourcing arrangements.

The proposed guidelines set out:

  • the governance, documentation, oversight and monitoring mechanisms that firms should have in place
  • the assessment and due diligence which should be undertaken prior to outsourcing
  • the minimum elements that outsourcing and sub-outsourcing agreements should include
  • the exit strategies and the access and audit rights that should to be catered for
  • the notification to competent authorities
  • the supervision by competent authorities

The proposed guidelines are consistent with the recommendations on outsourcing to cloud service providers published by the European Banking Authority (EBA) in February 2017 and subsequently incorporated into revised EBA guidelines on outsourcing arrangements in February 2019, and the guidelines on cloud outsourcing published by the European Insurance and Occupational Pensions Authority (EIOPA) in February 2020.

​The consultation is open until 1 September. It is important for national competent authorities, financial market participants that use cloud services provided by third parties and for cloud service providers. ESMA aims to publish the Final Report on the Guidelines by Q1 2021.

COVID-19: ESMA reminds MiFID II firms of conduct of business obligations when dealing with retail investors

ESMA reminded firms of their conduct of business obligations under the MiFID II Directive in the context of increasing retail investor activity during the COVID-19 pandemic. ESMA believes that firms have even greater duties when providing investment services to investors who decide to invest during these times of intensified market volatility. It reminds firms of their obligation to act honestly, fairly and professionally in accordance with the best interests of their clients and to comply with all relevant MiFID II conduct of business and related organisational requirements. In particular, ESMA highlights firms' obligations in respect of product governance, information disclosure, suitability and appropriateness.

FSB consults on effective practices for cyber incident response and recovery

The Financial Stability Board (FSB) is holding a consultation (closing 20 July 2020) on Effective Practices for Cyber Incident Response and Recovery. The consultation report provides a toolkit of effective practices to assist financial institutions in their cyber incident response and recovery activities. The toolkit lists 46 effective practices, structured across seven components:

  • governance
  • preparation
  • analysis
  • mitigation
  • restoration
  • improvement
  • coordination and communication

ESMA Risk Dashboard

ESMA published its first complete risk dashboard for 2020. It highlights the very high risks in all areas of ESMA’s remit. The COVID-19 pandemic, in combination with the valuation risks alerted in ESMA’s previous risk assessments, led to massive equity market corrections in 1Q20. ESMA had provided a risk dashboard up-date in April 2020. Since the April risk up-date, and despite the high uncertainty and worsening economic outlook ESMA notes that markets have seen a remarkable rebound. This reflects, in part, massive public policy interventions in the EU and elsewhere. ESMA notes that the market environment remains fragile.

Going forward, ESMA opines that this potential decoupling of financial market performance and underlying economic activity may lead to a prolonged period of risk to institutional and retail investors of further – possibly significant – market corrections. It sees very high risks across the whole of the ESMA remit. To what extent these risks will further materialise will critically depend on two drivers: the economic impact of the pandemic, and any occurrence of additional external events in an already fragile global environment. The impact on EU corporates and their credit quality, and on credit institutions are of particular concern, as are growing corporate and public indebtedness, as well as the sustainability of the recent market rebound.

COVID-19: Proposal to defer mandatory reporting of cross border tax arrangements under DAC6

In response to the disruption caused by COVID-19, the European Commission has proposed a three-month deferral period for the rules regarding the mandatory filing and exchange of information on reportable cross-border tax arrangements under DAC6. Please Go to publication for our Tax Team's analysis of what arrangements are reportable under DAC6, what the European Commission has proposed and how these changes will alter the reporting timelines.


EU action plan for a comprehensive EU AML/CFT policy.

The Commission launched an action plan for a comprehensive EU AML/CFT policy and a public consultation to gather the views of citizens and stakeholders on these measures. The consultation closes 29 July 2020. The plan to build an integrated EU AML/CFT system will be built on the following on six pillars:

  • ensuring the effective implementation of the existing EU AML/CFT framework
  • establishing an EU single rule book on AML/CFT
  • bringing about EU level AML/CFT supervision
  • establishing a support and cooperation mechanism for FIUs
  • enforcing Union-level criminal law provisions and information exchange
  • strengthening the international dimension of the EU AML/CFT framework

COVID-19- FATF paper

The Financial Action Task Force (FATF) published a paper which identifies challenges, good practices and policy responses to new ML/ TF threats and vulnerabilities arising from the COVID-19 crisis. The COVID-19 pandemic has led to unprecedented global challenges, human suffering and economic disruption. It has also led to an increase in COVID-19-related crimes, including fraud, cybercrime, misdirection or exploitation of government funds or international financial assistance, which is creating new sources of proceeds for illicit actors. The paper uses information provided to the members of the FATF Global Network in April, 2020. It identifies challenges, good practices and policy responses to new ML/ FT threats and vulnerabilities arising from the COVID-19 crisis.

European Commission adopts new Delegated Regulation amending list of high-risk third countries under 4AMLD

The European Commission adopted a delegated regulation to amend the list of high-risk third countries with strategic AML/ CTF deficiencies under Article 9(2) of 4AMLD. The press release is here.

The list is based on a revised methodology published on the same day. The key elements of the revised methodology are increased interaction with the FATF listing process, enhanced engagement with third countries and reinforced consultation of member states and the European Parliament.

The Delegated Regulation will amend delegated regulation (EU) 2016/1675 by:

  • adding third countries that have been identified as having strategic AML/ CTF deficiencies. This will add the Bahamas, Barbados, Botswana, Cambodia, Ghana, Jamaica, Mauritius, Mongolia, Myanmar/Burma, Nicaragua, Panama and Zimbabwe
  • removing third countries that are no longer perceived as presenting strategic AML/ CTF deficiencies. This will remove Bosnia-Herzegovina, Ethiopia, Guyana, Lao People’s Democratic Republic, Sri Lanka and Tunisia

The delegated regulation will be submitted to the Council of the EU and the Parliament to consider for approval within one month (with a possible one-month extension). If neither objects, it will be published in the official journal of the EU. It will enter into force 20 days after publication. Article 2 of the delegated regulation, which adds third countries to the list, will apply from 1 October 2020.