ESMA consultation on ESG refinements to the UCITS and AIFMD frameworks.

The European Securities and Markets Authority (ESMA) is holding three consultations on sustainable finance initiatives to support the European Commission’s Sustainability Action Plan in the areas of securities trading, investment funds and credit rating agencies (CRAs).

As referenced in our October bulletin, the European Commission adopted legislative proposals on sustainable finance in May 2018 which aim to establish an EU framework that puts environmental, social and governance (ESG) considerations at the heart of the financial system to help transform the EU economy into a greener, more resilient and circular system. This included (among other issues) refinements to the AIFMD and UCITS regimes.

In July 2018, ESMA was requested to provide technical advice so as to explicitly require the integration of sustainability risks in the investment decision processes. ESMA believes that this is better done within the UCITS and AIFMD frameworks through a high-level principles-based approach, similar to that already followed for a number of other relevant risks (such as interest rate or credit risk).

ESMA's proposals aim to clarify that all authorised fund managers subject to the UCITS and AIFMD regimes need to incorporate sustainability risks in their due diligence processes and assess and manage the sustainability risks stemming from their investments along with all other relevant risks such as market, interest or credit risk. To this end, sustainability risks need to be captured by the due diligence process and risk management systems in a way and to the extent that is appropriate to the size, nature, scope and complexity of their activities and the relevant investment strategies pursued.

Specifically, ESMA is proposing changes in the following areas of the UCITS and AIFMD frameworks:

  • 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 consultation poses a number of questions and sets out the text of proposed revisions to existing provisions. The existing UCITS and AIFMD frameworks do not include a legal definition of “sustainability risks”. ESMA therefore proposes that, for the purposes of the delegated acts pursuant to the UCITS Directive and AIFMD, ‘sustainability risk’ could be understood as the risk of fluctuation in the value of positions in the fund’s portfolio due to ESG factors.

Next steps:

  • The consultation will close on 19 February 2019.
  • ESMA aims to provide the requested technical advice to the European Commission on the integration of sustainability risks and factors in the UCITS Directive, AIFMD and MiFID II by 30 April 2019.
  • ESMA will hold an open hearing on 4 February 2019 and will use the consultation feedback to finalise its draft advice.

Cross-border distribution of collective investment funds

The European Parliament's Economic and Monetary Affairs Committee (ECON) published:

  • Report on the proposal for a Directive on the cross-border distribution of collective investment funds.
  • Report on the proposal for a Regulation on facilitating cross-border distribution of collective investment funds.

The EU Parliament will consider the reports.

The proposed Directive contains amendments to the UCITS Directive and the AIFMD relating to, among other things, pre-marketing and the discontinuation of marketing. These were reported earlier in our March 2018 bulletin.

ECON had published a press release announcing that it voted to adopt the draft reports and listed its proposed changes to the Commission's proposal.

The press release proposed that the exemption for UCITS concerning obligations under the PRIIPs Regulation relating to key information documents (KIDs) should be prolonged for a further two years.


The ESMA stakeholder group has called on the European Commission to implement a review of the PRIIPs Regulation.

ESMA published the hard hitting response of its Securities and Markets Stakeholder Group to the ESA PRIIPs consultation (discussed in our November bulletin).

As noted above, ECON published a press release which proposed that the exemption for UCITS concerning obligations under the PRIIPs Regulation relating to key information documents (KIDs) should be prolonged for a further two years.

We await developments.

Stress testing guidelines for Money Market Funds

ESMA published the responses to its Consultation on stress testing guidelines for Money Market Funds

Press release is here and responses are here.

Distance Marketing Directive

The European Commission published an evolution and fitness check roadmap of the Distance Marketing of Financial Services Directive. This is in line with the Commission's regulatory fitness and performance (REFIT) programme which aims to ensure that EU legislation delivers results for citizens and businesses effectively, efficiently and at minimum cost. The Commission webpage invites comments on the roadmap by 4 January 2019.

The Commission will hold a public consultation in early 2019. A targeted consultation involving national and regional authorities, retail financial services providers and intermediaries, industry associations and consumer organisations will also be held.

The Commission is aiming to conclude the evaluation of the Distance Marketing of Financial Services Directive in 2019.

ESMA Statement reminding MiFID firms to provide clients with information on the implications of Brexit

ESMA issued a statement to remind investment firms and credit institutions providing investment services (collectively firms) of their MiFID obligations to provide clients with accurate disclosures on the impact of Brexit. The statement is addressed to UK firms that provide services in EU27 Member States, as well as EU27 firms that deal with clients based in the UK. ESMA proposes that, in order to avoid any potential disruption arising from client confusion, firms that will be impacted by Brexit should ensure that they provide clear information to clients whose contracts and services may be affected. The information should be provided as soon as possible, once available, and should cover at least the following areas:

  • Impact of UK departure for the given firm and its business, and the implications this has for the relationship between the client and the firm
  • Actions the firm is taking such as organisational arrangements to deal with client inquiries
  • Implications for clients of any corporate restructuring and, in particular, any relevant changes to contractual terms
  • Contractual and statutory rights of clients in these circumstances, including the right to cancel the contract and any right of recourse, where applicable

ESMA and national competent authorities (NCAs) will continue to monitor developments, including by engaging with firms to assess the level of firms’ preparedness and to ensure that their clients are appropriately informed in the context of the firms’ preparation for Brexit.

Anti-Money Laundering / Combating the Financing of Terror / Corruption

EU AML action plan

On 4 December 2018, the Council of the EU announced that it has adopted conclusions on an anti-money laundering (AML) action plan. The AML action plan (set out in an Annex to the conclusions) sets out specific tasks and a timeline for 2019 and 2020. The European Commission is to report back on the progress made in implementing the action plan every six months from June 2019.


FATF issued its December Business Bulletin.

For more information in relation to this topic please contact a member of the Asset Management & Investment Funds team.