Investment Services and Fund Management

ESMA was tasked with delivering technical advice on integrating sustainability risks and factors in the Markets in Financial Instruments Directive (MiFID II) and in the Undertakings for Collective Investments in Transferable Securities (UCITS) and Alternative Investment Fund Managers (AIFMD) Directives.

Following a public consultation, ESMA submitted in 2019 its advice for amendments to the relevant rules applying to investment funds and investment firms.


Investment funds

ESMA recommended amending relevant requirements to ask all UCITS management companies and AIFMs to:

  • consider sustainability risks in their internal processes, systems and controls;
  • devote sufficient resources to the integration of sustainability risks; and
  • ensure that senior management is responsible for the integration of sustainability risks.

Fund managers should also consider sustainability risks in their due diligence processes.

The final versions of the Delegated Acts were published in the EU Official Journal in August 2021 ((EU) 2021/1270 and (EU) 2021/1255). The Delegated Acts are designed to complement the obligations in the Regulation on sustainability related disclosures in the financial services sector (SFDR) and the Taxonomy Regulation, incorporating sustainability issues and considerations into the EU financial services regulatory framework, including the UCITS Directive and the AIFMD. 

The European Commission has published in the Official Journal Commission Delegated Regulation (EU) 2022/1288 which complements the SFDR with detailed technical rules including mandatory templates that financial market participants – including asset managers – need to make available. On 28 April, the Commission has sent the European Supervisory Authorities a new mandate to review Principal Adverse Impact (PAI) indicators and certain product disclosures in the Delegated Regulation (for further information on the SFDR please consult (link to the Cross-sectoral work page of the Joint Committee).

ESMA has also published a Supervisory Briefing to ensure convergence in the supervision of investment funds with sustainability features, and in combating greenwashing by investment funds.


Investment firms

ESMA’s technical advice on MiFID II covered the following topics:

  • General organisational requirements: ESMA proposed to incorporate ESG considerations within firms’ processes, systems and controls in order to ensure the investment and advisory processes correctly take them into account;
  • Risk management: ESMA proposed to require firms to consider sustainability risks when establishing risk management policies and procedures, including for their Compliance function and Internal Audit;
  • Conflicts of interest: ESMA proposed that investment firms should disclose those types of conflicts of interest whose existence may be detrimental to the interests of a client, which stem from the distribution of:
    • investments in companies that adopt environmentally sustainable practices, are socially responsible, and/ or have good corporate governance; or
    • financial instruments that provide exposure to sustainable investments, social investments, and/or good governance investments;
  • Product governance: ESMA proposed requiring manufacturers and distributors to consider clients’ ESG preferences within the target market of investment products and within the mandatory product review process.

The European Commission has subsequently considered the advice provided by ESMA and introduced changes to the MiFID II delegated acts to integrate sustainability factors, risks and preferences into investment firms’ regulatory obligations.

ESMA is therefore working on updating its Guidelines on product governance and suitability requirements in order to reflect these amendments. A consultation paper on the review of the Guidelines on certain aspects of the MiFID II suitability requirements was published in January 2022. The main amendments reflected in the Guidelines on the topic of sustainability are:

  • Collection of information from clients on sustainability preferences: Firms will need to collect information from clients on their preferences in relation to the different types of sustainable investment products and to what extent they want to invest in these products.
  • Assessment of sustainability preferences: Once the firm has identified a range of suitable products for a client, in accordance with the criteria of knowledge and experience, financial situation and other investment objectives, it shall identify – in a second step – the product(s) that fulfil the client’s sustainability preferences; and
  • Organisational requirements: Firms will need to give staff appropriate training on sustainability topics and keep appropriate records of the sustainability preferences of the client (if any) and any updates of these preferences.

ESG disclosures by market participants and financial advisors

In 2019, the SFDR was published. The SFDR sets new ESG disclosure rules applicable to a broad range of financial market participants, including UCITS management companies, AIFMs and MiFID investment firms providing portfolio management, with the aim to improve disclosures to end-investors.

Under the SFDR, the ESAs Joint Committee of the European Supervisory Authorities (ESAs) has delivered a number of joint Regulatory Technical Standards (RTS), relating to:

  • Public disclosure of principal adverse impacts of investment decisions on sustainability factors, such as environmental and social matters, will apply to market participants on a comply or explain basis, except for companies with more than 500 employees for which the obligation is mandatory; and
  • Product specific disclosure (at a pre-contractual, public and periodic reporting level) showing how products fulfil environmental or social characteristics, or how they meet sustainable investment objectives.

The ESAs Joint Committee delivered in February 2021 to the European Commission the Final Report, including the draft RTS on SFDR.

In addition, the Taxonomy Regulation was published in June 2020. It is accompanied by a first delegated act on activities for climate change adaptation and mitigation objectives and by a complementary climate delegated act for specific gas and nuclear activities. The Taxonomy Regulation establishes the conditions and the framework to gradually create a unified classification system ('taxonomy') on what can be considered an environmentally sustainable economic activity. The Taxonomy Regulation places new disclosure obligations on financial market participants making available products that invest in taxonomy-eligible activities.

Furthermore, the Taxonomy Regulation tasked the ESAs to develop draft RTS on disclosures for financial products referred to in the SFDR. Specifically, the RTS should prescribe pre-contractual and periodic disclosures of how and to what extent the investments underlying financial products are in taxonomy-aligned economic activities.

The ESAs Joint Committee delivered in October 2021 to the European Commission their Final Report with draft RTS.