19 February 2019

EFAMA’s comments on ESMA’s consultation paper on integrating sustainability risks and factors in MiFID II

EFAMA agrees with ESMA’s suggestions to integrate sustainability risks within the MiFID II requirements through high-level principles. They allow for a proportionate consideration of ESG factors and risks by investment firms at a time when the sustainable investment market is rapidly developing, and discussions on the wider regulatory framework are not yet finalised (e.g. taxonomy).

Given that a common understanding of relevant sustainability factors and risks has not yet crystallised, regulators will need to take a more flexible approach in order not to overburden market participants, investors and capital-seeking enterprises. 

The new requirements must therefore be flexible enough to ensure that the full scope of sustainable investment approaches can still be carried out – dependent on the investor’s particular objectives. The proposed flexible approach will allow all market participants to progress from different starting points while at the same time avoiding overly burdensome implementation costs. This approach should also allow enough leeway for compatibility with future sustainability discussions outside the EU which, in turn, should boost global efforts to jointly tackle today’s challenges. 

EFAMA believes ESMA’s understanding of ‘sustainability risk’ to be a good starting point in the UCITS/AIFMD consultation as it links it to the financial materiality of an investment. Sustainability risk must be understood as the financial impact on the investment arising from environmental, social and governance considerations. This is different to the process of integrating ESG factors in the investment decision-making process, a concept linked to sustainable investment. These considerations should also be kept in mind for changes to MiFID II, whose ultimate purpose is to ensure that investors understand the impact of ESG risks on their investments and are able to take decisions on the basis of that knowledge. 

It is essential for ESMA, but also EIOPA and the Commission, to ensure consistency in all concepts and definitions not only within their internal respective work streams (i.e. MiFID II and UCITS/AIFMD) but also on a cross-sectoral basis (e.g. consistency of those two legislations with Solvency 2 and IDD). Most importantly, consistency can be further improved by aligning the terminologies used. ‘ESG’ and ‘sustainability’ are being used interchangeably throughout this and ESMA’s other consultation on the AIFM and UCITS Directives without any clear definitions of either. It is therefore essential for ESMA (and EIOPA) to align their final advices to the Commission accordingly.

Last but not least, it is essential that sufficient time be allowed to implement these changes. The Commission is suggesting only twelve months which is far too little time taking into account that changes to the MiFID II Delegated Directive must be implemented into Member States’ national laws first, followed by changes to the current target market concept. This will take time.

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