This article was written together with Eleonora Cambone.
The rise of ESG (Environmental, Social and Governance) and Sustainable investments is undebatable, and the figures testifying this are clear as day: as of December 2018, there are 2,816 European responsible investment funds domiciled in Europe with a total assets under management (AuM) of EUR 496 billion. This is a 27% increase in the number of funds and 12.5% in AuM. Due to new subscriptions, funds created in 2018 will likely increase their AuM in the coming years.
The increased popularity is fueled not only by changing dynamics from the investors’ perspective (e.g. rise of millennial investors and increased climate change awareness), but also from regulatory push. Upcoming legislation is predicted to bring disruptions and new challenges: it’s time for asset managers to fasten their seatbelts for a challenging journey.
UCITS & AIFM Directives
Following the European Commission’s Action Plan on Sustainable Finance, ESMA has provided technical advice with a consultation paper on the delegated acts that will amend the legislation. Asset managers will mainly be impacted by the amended UCITS (Commission Directive 2010/43/EU) and AIFM (Commission Delegated Regulation EU 231/2013) directives that bring changes to three main areas: Organizational Requirements, Operating Conditions, and Risk Management.
- Sustainability risks to be integrated in the investment decision-making procedures and organizational structure
- Ensure that ManCos/AIFMs have the proper resources (skills, knowledge and expertise) to effectively integrate sustainability risks
- Senior Management is responsible for the integration, including implementing the investment policy, ensuring valuation policies and procedures are adequate, approval of internal procedures for investment decisions, risk management policy
- Conflicts of interest linked to the integration of sustainability risks to be identified, managed and mitigated (identification to include conflicts arising from remuneration or personal transaction, and between funds with different investment strategies managed by the same ManCo/AIFM)
- Due diligence on investments enhanced by taking into account sustainability risks and the principal adverse impact on sustainability factors
- Risk Management policy to comprise procedures to enable ManCo/AIFM to assess sustainability risks