The European Commission is calling for feedback on how investment firms, funds and insurance companies should incorporate sustainability into fiduciary duties and suitability tests, in six draft acts together forming another key pillar of the EU Action Plan and wider green deal agenda.
Once the amended regulations are adopted and applied, investment and insurance advisers will be required to ask about their clients’ ESG preferences and take them into account when recommending financial instruments and products to clients.
While some of the other main pillars of the EU sustainable finance agenda – namely, the taxonomy, disclosures and benchmark rules – required an entirely new set of regulation, efforts to clarify the role of ESG in investor duties and suitability tests have centred on updating existing directives.
The directives pending amendment are UCITS, AIFM, Solvency II, the Insurance Distribution Directive (IDD) and MiFID II, with the consultation feedback period running until July 6.
The delegated acts under the IDD and under MiFID II relate to suitability tests, and clarify that investment firms and insurers should explicitly consider clients’ “sustainability preferences”.
The MiFID II amendment says accounting for “sustainability preferences” means offering clients a choice of financial instruments with “sustainable investments as [their] objective” – referred to informally as “dark green” products – and those “that promote environmental or social characteristics”, either by pursuing sustainable investment to some extent or by consider adverse impacts on sustainability factors – so-called “light green” products.
It says investment firms should specify “to which group of clients with specific sustainability preferences the financial instrument is supposed to be distributed” and that “a general statement that a financial instrument has a sustainability-related profile should not be sufficient”.
In its final report, the HLEG recommended that the EU "require investment advisers to ask about, and then respond to, retail investors’ preferences about the sustainable impact of their investments, as a routine component of financial advice". It also said there was a need to “discuss the governance of addressing long-term and sustainability risks”.
The amendments to delegated acts under UCITS, AIFM and Solvency II clarify that fiduciary duty includes the integration of the consideration of sustainability risks – risks that have impact on the value of the portfolio, as defined in the new Disclosures Regulation.
The UCITS amendment clarifies that mutual fund managers must also consider and disclose adverse sustainability impacts of investment decisions.
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