Newsletter – July 2022 – Economic analysis

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Asset management and investment funds

ESMA report on UCITS fees and commissions

On 31 May 2022, ESMA published its report on the Joint Supervisory Action (“CSA”) on UCITS Costs and Fees which was conducted with National Competent Authorities (“NCAs”) (including the CSSF) in 2021.

This report sets out ESMA’s analysis and conclusions on the CSA and presents ESMA’s point of view on the various conclusions, in particular on the process for setting and reviewing fees, the notion of undue costs, the issues arising from related party transactions and EPM techniques, as well as follow-up actions envisaged by NCAs and key lessons learned.

This report is therefore important not only for the NCAs but also for the funds and their managers. For more information on this subject, see the article “ESMA report on UCITS costs and fees: key points” on our website.

ESG – update on sustainable finance

Over the past weeks and months, the European Commission and the European Supervisory Authorities have issued guidance to clarify certain concepts regarding the application of the SFDR and the Taxonomy Regulation.

These include the SFDR RTS (adopted by the European Common on 6 April 2022 but not yet published in the OJEU) which is expected to enter into force on 1 January 2023, a Commission FAQ on SFDR (25 May 2022), a Supervisory Statement (May 31, 2022) from ESMA on EU convergence in the supervision of investment funds with sustainability features and another from AES (June 2, 2022) with details on the SFDR RTS.

As for the next steps, as of August 2, 2022, MiFID firms that provide portfolio management services and investment advice to their clients will have to include in the suitability test specific questions relating to investment preferences. sustainable investment of these customers (Delegated Regulation (EU) 2021/1253).

In addition to the sustainability preferences, the product governance rules under MiFID have been amended and will become applicable in November 2022. Compliance with the new MiFID provisions on sustainability preferences will be particularly challenging for the asset management sector due to several factors, such as:

  • The fact that the SFDR RTS will only become applicable on January 1, 2023;

  • ESMA has not yet published guidelines on the scope of these new MiFID ESG obligations.

The European investment fund industry has taken steps to anticipate as far as possible the imminent application of the new MiFID sustainability preference requirements. This is notably reflected in the publication of a European ESG Template (EET), which is a cross-industry model bringing together the points of view of the banking, asset management, structured products, insurance and retirement. It is designed to standardize the exchange of SFDR/taxonomy related data between these industry players.

The EET notably includes information from the manufacturer of financial products (i.e. investment funds) which distributors and advisers need to fulfill their new MiFID obligations.

Despite all these efforts and initiatives, the lack of ESG data on the market remains a major obstacle to the effective application of the various rules of sustainable finance. Examples include:

  • information on environmentally sustainable economic activities to be disclosed by companies subject to the Non-Financial Reporting Directive (Directive 2014/95/EU) in accordance with the Delegated Act supplementing the Taxonomy Regulation (Delegated Regulation (EU) 2021/2178) will not be fully available until 2024; and

  • the proposal for a directive on corporate sustainable development reports, which will notably broaden the scope of entities subject to the directive on non-financial reports, has not yet been finalised.

Alongside the MiFID changes, Directive 2010/43/EU (UCITS level 2 – link) and Regulation 231/2013 (AIFM level 2 – link) have also been amended to reflect the new SFDR requirements. The new measures that apply to managers of AIFs and UCITS from 1 August 2022 are briefly described below:

  • Asset selection process (due diligence): sustainability risks must be taken into account.
  • Human resources: The necessary ESG resources and expertise are needed to effectively integrate sustainability risks into processes and procedures, as well as to ensure effective monitoring.
  • Conflict of Interest: An assessment of any conflicts of interest that may arise as a result of integrating sustainability risks into processes and policies.
  • Risk management: The risk management process and policy will need to be reviewed to ensure that it covers sustainability risks.
  • Organizational systems and controls: Sustainability risks should be considered in organizational procedures, controls and reporting.
  • Responsibilities of senior management: senior management is responsible for integrating sustainability risks in the following areas:
  • the implementation of investment policies;

  • oversee the approval of investment strategies;

  • evaluation policies and procedures;

  • the compliance function;

  • what is done to ensure and periodically verify that the investment policy, investment strategies and risk limits are correctly and effectively implemented and respected;

  • periodic approval and review of the adequacy of internal procedures for making investment decisions, to ensure that such decisions are consistent with their respective investment strategies;

  • risk management policies and procedures, including risk limits for each of the funds they manage; and

  • (for AIFMs) the remuneration policy.

Finally, there have also been recent developments with regard to gas and nuclear activities and in particular the European Commission’s proposal for a Supplementary Delegated Act on Climate Taxonomy which includes a list of criteria classifying investments in generation of nuclear or gas electricity as “sustainable” (“Taxonomy Acte Délégué Complémentaire Climat”). The deadline to oppose the Commission’s proposal was July 11, 2022. defeated a motion to oppose the inclusion of nuclear and gas as environmentally sustainable economic activities, with the review period (i.e. opposition period) now being expired, the complementary climate taxonomic delegated act will be published in the Official Journal and will be applicable from 1 January 2023.

To view the full article, please click here.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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