Asset Management & Investment Funds: EU & International Developments - Aug 2021
Asset Management & Investment Funds: EU & International Developments - Aug 2021
AIF and UCITS integration of sustainability risks and factors- effective 1 August 2022
An amending UCITS Directive and amending AIFMD Regulation were published in the OJ. From 1 August 2022, these will oblige AIFMs and UCITS ManCos to integrate sustainability risks and factors into their policies, procedures and operations.
Commission Delegated Directive (EU) 2021/1270 amending Directive 2010/43/EU as regards the sustainability risks and sustainability factors to be taken into account for UCITS. Directive 2010/43/EU supplements the UCITS Directive (2009/65/EC) as regards organisational requirements, conflicts of interest, conduct of business, risk management and content of the agreement between a depositary and a management company. Requirements are to apply from 1 August 2022.
Commission Delegated Regulation (EU) 2021/1255 amending Delegated Regulation (EU) 231/2013 as regards the sustainability risks and sustainability factors to be taken into account by AIFMs. Delegated Regulation (EU) 231/2013 supplements the AIFMD with regard to exemptions, general operating conditions, depositaries, leverage, transparency and supervision. The Regulation is to apply from 1 August 2022.
The Commission adopted the Delegated Regulations and Directive on 21 April 2021. They were published on 2 August 2021 and enter into force on the twentieth day after publication.
Draft texts progressing the UCITS KIID/ PRIIPs KID transition
The European Commission adopted two 'quick-fix' proposals to amend the PRIIPs Regulation and to amend the UCITS Directive on 15 July 2021. The two proposals advance the plan to replace the UCITS KIID and PRIIPs KID with one revised PRIIPs KID, based on the technical standards adopted by the European Supervisory Authorities in February. This aims to give retail investors more comparability and to standardise the provision of pre-contractual information for retail investors in the EU. The two quick-fixes aim to synchronise all application dates to give retail investment market participants time to prepare for the new PRIIPs Delegated Regulation, and ensure a smooth transition into the new rules, which should normally enter into force on 1 July 2022.
As noted in our July bulletin, the European Commission's consultation on the proposal for a Regulation amending the PRIIPs Regulation closes 9 September 2021.
EU sustainability-related disclosures - delayed until 1 July 2022 and EC replies to SFDR questions
As noted in our July bulletin, 1 July 2022 is the new date for implementation of the next phase of sustainability-related disclosure requirements under the Sustainable Finance Disclosures Regulation (SFDR). This is a 6-month deferral from 1 January 2022. Affected disclosures include template pre-contractual and financial statement disclosures and environmental-related disclosure requirements under the EU Taxonomy for so-called light-green and dark-green products and a detailed principal adverse impact statement.
Our Asset Management & Investment Funds team put together a briefing on the SFDR deferral and the European Commission's Q&A. You can read it by clicking on the link below.
The administrator of LIBOR has indicated the most widely referenced benchmarks globally will, mostly, no longer be useable as early as the beginning of 2022. Market participants must prepare for this. The European Commission published an article which discusses the transition phase, the Commission's power to designate a statutory replacement for references to a benchmark in existing contracts and financial instruments governed by the laws of an EU Member State, and the June joint statement of the European Commission, ESMA, ECB Banking Supervision and the EBA, on the forthcoming cessation of all LIBOR settings.
New MMFR regulation on requirements for assets received by MMFs as part of reverse repos
Commission Delegated Regulation (EU) 2021/1383 amending Delegated Regulation (EU) 2018/990 with regard to requirements for assets received by money market funds (MMFs) as part of reverse repurchase agreements will come into force on 12 September 2021.
Eligible investments in reverse repurchase agreements, received by managers of MMFs, are subject to supplementary qualitative and quantitative requirements, including a specific adjustment to the value of an asset (a haircut). Those requirements do not apply to transactions entered into with credit institutions, investment firms and insurance undertakings that are established in the Union or that are covered by an equivalence decision. This regulation specifies the procedures for determining the equivalence of the third country in which those entities are established for those exemptions to be applied. It is directly applicable.
EU Taxonomy: draft report on taxonomy expansion "beyond green"
This is a divisive area, even within the members of the EU Platform on Sustainable Finance. The Taxonomy Regulation requires a report to be issued on this point by the end of 2021 and the draft report on the Taxonomy extension requesting feedback from stakeholders (by 27 August) is a step in the process of producing that report.
The ambition of the EU Taxonomy is to become the gold standard for green finance, not just in Europe, but also amongst international taxonomy efforts. This is one reason it is seen as important to investigate extension of the EU Taxonomy. In the European Commission's view, the current design of the Taxonomy is often misinterpreted as binary. As a result, activities unable to report as ‘green’ may be mistakenly considered by some users as environmentally ‘unsustainable’.
In addition, concerns have been raised that the current Taxonomy design does not give sufficient recognition to corporates transitioning towards a more sustainable business model, but whose activities fail to meet "substantial contribution", and risks penalising them and restricting their access to capital.
Some actors in the investment markets have also raised the prospect of a ‘green bubble’, arguing that with the current design of the Taxonomy, a large demand for sustainable financial products would seek the narrow supply of Taxonomy-aligned assets.
Whilst acknowledging that there are arguments for and against extending the EU Taxonomy beyond green, the Platform considers the balance of evidence is that sustainable finance initiatives to date have neither significantly increased transition finance nor driven sufficiently ambitious environmental transitions.
After considering the stakeholder input, the Platform will submit final reports with their advice to the Commission in autumn 2021. The Commission will analyse and consider these reports in view of the continuous development of the EU taxonomy, as anticipated in the new strategy for financing the transition to a sustainable economy.
EU Social taxonomy draft report
With the aim of extending the scope of the EU Taxonomy, which currently addresses environmentally sustainable objectives, the EU's Platform on Sustainable Finance published a draft report on a social taxonomy on 12 July 2021.
Built on the foundation of international norms and principles like the UN sustainable development goals (SDG) and the UN guiding principles for businesses and human rights, the draft report argues that a social taxonomy would help investors to identify opportunities to finance solutions around ensuring decent work, enabling inclusive and sustainable communities and affordable healthcare and housing.
There are also many indications that investors see social investments as an opportunity, just as they acknowledge that it is risky not to take social factors into account in investments. The report proposes that it is crucial to spell out what constitutes a social investment, as has been done in the case of environmental investments.
There is much work yet to do on developing a social taxonomy and this report represents the step of seeking stakeholder feedback on the proposals (by 27 August 2021).
After considering the stakeholder input, the Platform will submit final reports with its advice to the European Commission in Autumn 2021. The Commission will analyse and consider these reports in view of the continuous development of the EU taxonomy, as anticipated in the new strategy for financing the transition to a sustainable economy.
EBA consultation on the role of AML/CFT compliance officers and AML/CFT governance
The European Banking Authority (EBA) is holding a consultation on new Guidelines on the role, tasks and responsibilities of AML/CTF compliance officers. The Guidelines also include provisions on the wider AML/CFT governance set-up, including at the level of the group. Once adopted, these Guidelines will apply to all financial sector operators that are within the scope of the AML Directive. The consultation closes on 2 November 2021.