Draft sustainability rules for investment firms published

The draft delegated act is part of the EU’s action plan on sustainable finance, which seeks to ensure investors have clear information on the social and environmental risks and opportunities attached to their investments. The commission said the aim was to direct capital flows towards socially responsible activities.

The proposed rules would integrate sustainability considerations into investment, advisory and disclosure processes in a consistent manner across sectors. The commission said they would “anchor environmental, social and governance (sustainability) considerations at the heart of the financial system to help transform Europe's economy into a greener, low-carbon, more resilient, resource-efficient and circular system”.

Under the proposals, fund managers will have to inform investors about the environmental, social and governance (ESG) risks involved in their investment. They will have to explicitly take clients’ sustainability preferences into account and consider sustainability preferences when specifying the type of client a product is aimed at.

Investment funds expert Ruth Hennessy of Pinsent Masons, the law firm behind Out-Law, welcomed the proposals.

“Increased clarity to shareholders and investors via website and prospectus disclosures will allow them to better understand their exposure to sustainability risks and will increase sustainable investment more generally,” Hennessy said.

“The new suite of legislative measures require significant planning by all management companies, regardless of whether they manage ESG funds, to ensure compliance by the March 2021 deadline,” Hennessy said.

The draft directive is open for feedback until 6 July 2020. Its publication follows extensive consultation, starting with the establishment of a high-level working group in December 2016.

The directive includes feedback given to the European Securities and Markets Authority (ESMA) during a consultation on integrating sustainability risks and factors into the second iteration of the Markets in Financial Instruments Directive. The Commission said recommendations on product governance and oversight structures prepared by ESMA had been integrated into the draft delegated directive.

Last year the European Commission published the Disclosure Regulation, which requires financial firms to disclose how they integrate sustainability considerations into their processes in a standardised way from 2021.