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Warning over “unintended consequences” for sustainability as EU consults on amendments to investment rules

Market players respond to planned changes to UCITS, AIFMD and MiFID

There has been a warning that too narrow a definition of sustainability in draft changes to European Union investment legislation designed to promote sustainability may have the unintended consequence of  undermining the EU's efforts.

The EU action plan on sustainable finance seeks to clarify the duties of financial institutions to provide their clients with clear advice on the social and environmental risks and opportunities attached to their investments. 

To this end, a consultation on a package of so-called delegated acts that seek to integrate sustainability risks and sustainability factors into the UCITS (funds), AIFMD (alternative investment funds) and MiFID (Markets in Financial Instruments Directive) rules has just closed.

In its response, UK fund manager Aviva, said it is concerned that the definition of “sustainability preferences” in the draft covering MIFiD was too narrow "and may have the unintended consequence of undermining broader policy aims of using financing to help as wide a part of the economy transition into sustainable practices".

It says that the likely effect of the definition will drive investors towards products that are already sustainable: "It fails to engage the wider role that financing can play in the transition, through for example, stewardship, integration, or impact investments. 

"The failure to engage client demand to finance that wider range of activities overlooks the importance of creating conditions that support investing to support the transition." It said successfully challenging those that can transition to do so is arguably even more important than funding those that are "pure play solutions providers".

The Investment Association, the UK trade body, also expressed "serious concerns" about the definition of “sustainability preferences”. The proposed definition narrows the universe of sustainability-related products beyond the categories set out in Regulation (EU) 2019/2088 [a new regulation on sustainability-related disclosures]. It also has  concerns around data availability and the need to recognise the importance of qualitative assessment.

Trade body the European Fund and Asset Management Association (EFAMA) says the proposed changes in their current state will not achieve the goal of making sustainable investing mainstream. “The question European policymakers are now faced with, is whether to create a standardised tick-the-box system – putting sustainability in a niche – or to opt for a flexible approach promoting dynamic developments in sustainable investing," said Director General Tanguy van de Werve.

EFAMA is calling for MiFID to be fully aligned with the Sustainable Finance Disclosures Regulation (SFDR) with a clear distinction between Article 8 products (i.e. products promoting environmental and social characteristics, aka ESG strategy products) and Article 9 products (i.e. products pursuing sustainability investments).

It wants to avoid a situation in which a client who expresses sustainability preferences cannot be offered an Article 8 product while the very same product can be marketed as promoting environmental or social characteristics under SFDR.

It also said the requirements for sustainability risk management "underscore the need" for reliable information. It notes that changes to the NFDR (Non-Financial Reporting Directive) will improve the availability and reliability of ESG data – but it won't be in place for the UCITS and AIFMD amendments to take effect.

The Principles for Responsible Investment said the delegated acts "do not directly address the need to integrate sustainability risks when determining how to act in the best interests of end investors". 

"Without explicit clarification of the relationship between sustainability and fiduciary duties, we are concerned that investors will continue to lack the necessary certainty, undermining systematic integration of sustainability risks." A similar point was made by ShareAction and others.

The 2 Degrees Investing Initiative response highlighted the fact that there is no reference to investment horizon and no linking back through the investment chain to the end client’s sustainability preferences or to the immediately preceding step of the investment chain" ( a recommendation of the High Level Expert Group, HLEG).

And it said the current amendments do not seem to leave any room for impact-oriented funds or any wider responsible stewardship in linking the financial system with tangible changes in the real economy.

Eurosif warned about adopting a definition that is "too granular and excessively restrictive when considering clients’ sustainability preferences".

The BVI, the German fund industry association, wanted the timelines for changing the rules for funds to be aligned with the disclosure requirements under SFDR. It is calling for the application date for the SFDR regime to be extended to January 1 2022 "to allow for an orderly implementation of all new ESG-related rules for investment funds".

"Such postponement would warrant that adaptations of internal processes and organisational measures are in place before the application of SFDR and form a tangible basis for fund-related ESG disclosures."

BNP Paribas Asset Management says the delegated acts should clearly specify that qualitative statements of sustainability risks can be used at least as intermediate steps.

Delegated acts update existing legislation and once adopted by the Commission, the European Parliament and Council generally have two months to formulate any objections. If they do not, the delegated act enters into force. The feedback period lasted from June 8 – July 6.