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Interested parties had until 6 July to provide feedback on these and other draft delegated acts aiming to incorporate sustainability issues and considerations into the EU financial services regulatory framework, as formed by the UCITS Directive, the Alternative Investment Fund Managers Directive (AIFMD), and MiFID II.
The proposed amendments to the MiFID delegated acts include requiring investment firms to consider the sustainability preferences of clients in determining the suitability of products.
The Commission has proposed these preferences be defined in relation to two types of financial products that are defined by the recently adopted sustainable finance disclosures regulation (SFDR): so-called Article 8 products that promote environmental and social characteristics and Article 9 products that pursue sustainability objectives.
However, in its draft text the Commission argues that products in the former category “do not necessarily achieve” a certain level of sustainability and should therefore meet additional requirements if they are to be deemed suitable for clients with sustainability preferences.
These additional limitations have provoked concerns among stakeholders – the Investment Association said it had “serious” concerns, the PRI said they were “substantial”.
EFAMA said it strongly rejected the Commission’s aforementioned portrayal of Article 8 and that it was “essential” the EC change its current proposals to ensure the final delegated acts were fully aligned with the SFDR.
Andreas Stepnitzka, senior regulatory policy adviser at the European asset management trade body, told IPE the Commission was giving its own interpretation of Article 8 products.
“What we understood was that some people in the Commission didn’t like where Article 8 has ended up after having been discussed with the co-legislators,” he said. “In a way the Commission is not playing by the rules.”
At Schroders, deputy head of public policy Elisabeth Ottawa assessed the situation thus: “[T]he suggested additional requirements lack any justification, are in conflict with the co-legislators’ will clearly expressed in SFDR and the taxonomy regulation and limit investor’s ESG product choice.
“Also, they will potentially confuse investors when confronted with different categories/definitions of ESG products, depending on the point of communication,” she said.
Sustainability boost questioned
Others focussed on the potential real world environmental and social implications of the Commission’s proposed definition.
In its feedback, Aviva said it saw incorporating sustainability into suitability assessments as a “a key game-changer in investment behaviour” but that the proposed definition, despite being an improvement on that in earlier drafts, was too narrowly drawn.
“[It] 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,” the insurer said.
“It fails to engage the wider role that financing can play in the transition, through for example, stewardship, integration, or impact investments,” it added. “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.”
The PRI argued that the “gold-plating” of Article 8 funds was misguided, and reflected an inaccurate understanding of how individual investors could influence outcomes in the real economy.
“In many cases, exposure to harmful activities is essential to influencing environmental performance of underlying investee (for example, through voting in support of adoption of meaningful climate transition plans),” said the investor association.
“Stating that a client can only have a preference for a fund that avoids all exposure to harmful activities would remove fund options that may be better aligned with their preferences.”
NGOs echoed some of the aforementioned concerns. ShareAction, for example, writing that “we fear that the provisions as they are could lead to the promotion of exclusionary products only (based on negative screening) and neglect the positive impact component of sustainable investing”.
However, its diagnosis was that the problem lay not with the definition of the potential product offering, but with the absence of a more detailed framework for how to assess clients’ sustainability preferences.
Think tank 2° Investing Initiative has been carrying out research on retail investors and their sustainability preferences, and said it was “unclear as to the rationale for limiting the pool of financial instruments for a client’s preferences” in the way the Commission was proposing.
“More crucially,” it said, “the current definition still fails to identify the financial instruments sought by impact-oriented clients”.
The remedies suggested by the various stakeholders varied.
Aviva, EFAMA, the Investment Association and Schroders called for the Commission to scrap the additional limitations on Article 8 products, while 2° Investing Initiative suggested that the sustainability preferences definition be amended to include an additional category of financial instrument.
It defined this as “a financial instrument that “has as its objective to positively impact the environment and society through a specific and measurable contribution of the investor”.
The PRI, meanwhile, suggested scrapping the attempt to define a client’s sustainability preferences in relation to fund categories and to instead adopt a broader definition.
It recommended the following: Sustainability preferences means a
client’s or potential client’s choice as whether, to what extent and how
sustainability-related investment objectives should be reflected into
his or her investment strategy.