Asset Management & Investment Funds: EU & International Developments – December 2022

ESMA consultation on fund names using ESG or sustainability-related terms

The European Securities and Markets Authority (ESMA) published a consultation paper on guidelines for fund names using ESG or sustainability-related terms. The draft guidelines aim to tackle greenwashing risks in funds, by providing quantitative thresholds for the use of ESG and sustainability related terminology in funds’ names so that marketing communications are clear, fair and not misleading. Go to publication.

The main elements are:

  • If a fund uses any ESG-related words in its name, it should allocate at least 80% of its investments to meet the environmental or social characteristics or sustainable investment objectives.
  • If a fund uses the word “sustainable” or any other sustainable related term derived from the word “sustainable” in its name, it should allocate within the 80% of investments, at least a 50% minimum proportion of sustainable investments as defined under SFDR.
  • The application of minimum safeguards to all investments for funds using such terms (exclusion criteria).
  • Additional considerations for specific types of funds (index and impact funds).

ESMA proposes that the draft guidelines would apply from three months after the publication of their translation on the ESMA website. A transitional period of six months is suggested for those funds launched prior the application date.

The consultation closes on 20 February 2023.

ESAs call for evidence on greenwashing

The European Supervisory Authorities (ESAs) published a Call for Evidence on greenwashing to gather input from stakeholders on how to understand the key features, drivers and risks associated with greenwashing and to collect examples of potential greenwashing practices. It closes 10 January 2023.

All interested parties are welcome to contribute to the survey before 20 February 2023, including financial institutions under the remit of the three ESAs and other stakeholders ranging from retail investors and consumers' associations to NGOs and academia. Contributions should focus on greenwashing risks and occurrences arising in the financial sector and affecting financial products or services, which are under the scope of the ESAs.

Responses will feed into the ESAs' findings for their progress reports due in May 2023, and final reports due in May 2024.

ESAs Q&A on the SFDR delegated regulation

The European Supervisory Authorities issued a new Q&A document on the application of the SFDR Delegated Regulation.

  • Section I looks at current value of all investments in PAI and taxonomy-aligned disclosures. This includes Q&As on calculation of "current value", "all investments" and treatment of short positions
  • Section II looks at PAI disclosures (and the calculation methods)
  • Section III looks at financial product disclosures
    • Q&A 1  notes that sections of the disclosure template that are deemed not relevant may be removed where permitted by the red drafting notes on the template
    • Q&A 4 notes, on Article 6 funds, that even in the unlikely situation that Article 6 funds do not consider sustainability risks relevant, they have to explain the reasons for not considering these risks relevant.
  • Section IV looks at multi-option products
  • Section V looks at taxonomy-aligned investment disclosures
  • Section VI looks at financial advisers and execution-only FMPs

These Q&As are distinct from the questions sent by the ESAs to the Commission in September 2022, which deal with matters relating to L1 interpretation, such as the definition of sustainable investments. Responses have not yet issued on these Q&As.

European Commission speech - sustainable finance initiatives 

Mairead McGuinness, European Commissioner for Financial Services, Financial Stability and Capital Markets Union (CMU), spoke at a joint meeting of its Economic and Monetary Affairs Committee (ECON) and Environment, Public Health and Food Safety Committee (ENVI). She spoke of the following sustainable finance initiatives:

  • Disclosures. The European Commission intends to publish a set of ​Q&As on the Sustainable Finance Disclosure Regulation ((EU) 2019/2088) (SFDR) early in 2023. The Q&As may address concerns relating to the application of fundamental concepts in the SFDR, legal and reputational risks, and greenwashing.

    The Commission is currently assessing the implementation of the SFDR and intends to publish a consultation early in 2023. The Commission's review will focus on how the regulation ensures legal certainty, its usability and its role in mitigating greenwashing.
  • ESG ratings. The Commission is considering a proposal to bring transparency to the EU ESG ratings market and introduce rules on the operations of ESG rating agencies.
  • Taxonomy. The Commission intends to publish over 200 FAQs to support businesses with reporting obligations under the Taxonomy Regulation ((EU) 2020/852). It also aims to make available new online tools and improve its collection of feedback from the market on usability.

ESMA speech - supervisory priorities and challenges for investment managers​

​ESMA's Natasha Cazenave spoke at EFAMA 2022, focussing on sustainable finance as well as the deteriorating macro-economic situation and heightened risks in financial markets.

Sustainable finance is one of the key areas that will structure ESMA's work in both regulation and supervision over the medium term. For the asset management industry, the impact is profound with significant new disclosure and risk management requirements. Specifically:

  • The incoming Union Strategic Supervisory Priority (USSP). USSPs are used by ESMA to coordinate supervisory action with NCAs. This provides an EU structured and comprehensive response to address specific risks. NCAs then take these priorities into account when drawing up their own work programmes.
  • A CSA on sustainability risks  and disclosures. Will launch in H2 2023. It will inform ESMA's work on greenwashing.
  • ESMA is contributing to the work of EFRAG and the ISSB on the standardisation of corporate sustainability reporting.
  • ESMA will continue efforts to clarify rules where possible with the intention of making them less complex and more comprehensible. The ESAs sent several queries to the European Commission. The ESAs published a first set of technical Q&As related to the application of the SFDR Delegated Regulation.
  • The European Commission asked ESMA to monitor the implementation of relevant sustainable finance legislation and to map and assess the supervisory response. ESMA aims to report findings by interim report by May 2023 and by final report by May 2024.

Ms Cazenove also addressed resilience of the non-bank sector

  • Money market funds resilience could be strengthened via improvements to the EU MMF regulation.
  • Open ended funds need to focus on liquidity and leverage risk. The speech references the review of the AIFM and UCITS Directives:
    • The speech references the creation of an EU-wide reporting regime for UCITS and tools to mitigate risks related to liquidity and leverage. While some of these tools should generally be in the hand of asset managers such as most liquidity management tools, regulators should provide guidance to encourage their use.
    • On leverage, explicit limits should be either enshrined in regulations for UCITS or regulators should be able to implement appropriate leverage limits as is the case for AIFs under Article 25 of AIFMD.
    • The enhanced use of macroprudential stress tests is also recommended. While asset managers already perform a range of stress tests at fund level, regulators could consider running formal sector-wide stress test to identify pockets of vulnerabilities.

ESMA guidelines on MMF stress tests

ESMA published its Final Report on the 2022 update of guidelines on MMF stress tests under the Money Market Funds Regulation (MMFR).

The 2022 update takes into account economic uncertainties and risks for MMFs, including the recent stress episode on the GBP money market. These ESMA guidelines are updated at least every year considering the latest market developments.

ESMA worked with the European Systemic Risk Board and the European Central Bank in calibrating the new risk parameters.

IMF Liquidity Stress Testing and Systemic Risk Report

The IMF published a technical note on stress testing and system risk analysis across the financial sector in Ireland. The report indicated that the “majority of Irish-Domiciled funds are resilient, but pockets of vulnerability exist”.

The report recommended that the CBI review the use of liquidity management tools, particularly for vulnerable cohorts of funds (such as high-yield bond funds and emerging-market focused fixed-income funds) and that CBI complete its internal liquidity stress testing framework for funds.

AML/CFT/Sanctions

The European Commission issued its supra national risk assessment (SNRA) on the assessment of the risk of money laundering and terrorist financing affecting the internal market and relating to cross-border activities.  The Commission also issued a staff working document, the SNRA analyzes money laundering and terrorism financing risks and recommends a comprehensive action plan to address them. The report also considers “sectors or products where relevant changes have been detected.”

For more information please contact a member of the Asset Management & Investment Funds team.

Date published: 14 December 2022