ESMA has issued a consultation paper outlining its proposals in response to a request from the European Commission to provide technical advice on how to integrate sustainability risks into both the UCITS Directive and the AIFMD. "Sustainability risk" has been described by ESMA as the risk of fluctuation in the value of positions in a fund’s portfolio due to ESG factors.
ESMA’s proposals aim to clarify that all authorised fund managers subject to the UCITS and AIFMD regimes will need to incorporate sustainability risks into their internal processes. Proposed changes to the UCITS and AIFMD regimes include:
- 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;
- consideration of the required resources and expertise for integration of sustainability risks;
- clarification that the integration of sustainability risks is part of the responsibilities of senior management;
- consideration of the various conflicts of interest arising in relation to sustainability risks;
- consideration of sustainability risks when selecting and monitoring investments, designing written policies on due diligence and implementing effective arrangements; and
- explicit inclusion of sustainability risks when establishing and maintaining a documented risk management policy.
The consultation closes on 19 February 2019. ESMA aims to provide the finalised technical advice to the European Commission on the integration of sustainability risks into the UCITS Directive and AIFMD by 30 April 2019.