Asset Management & Investment Funds: EU & International Developments – October 2023

ESMA sees an increase in the use of ESG-related language in the EU fund industry 

On 2 October 2023, ESMA published a risk analysis report on environmental, social and governance (ESG) names and claims in the EU funds industry.

In the report, ESMA shows that the share of EU UCITS investment funds with ESG words in their name has increased from less than 3% in 2013 to 14% in 2023. The article further highlights that fund managers tend to prefer using generic language (‘ESG’, ‘Sustainable’) rather than more specific words. This can make it more difficult for investors to verify that the fund portfolio is in line with the name.

Through the study, ESMA has identified that:

  • An increasing number of funds include ESG terms in their names and, of the ESG terms included, funds prefer to include broad ESG terms (such as "sustainable"). There is also evidence of high and consistent investor appetite for funds with an ESG-related term in their name, relative to funds without any ESG words in their name.
  • Funds with ESG-related language in their name, and funds disclosing under Article 9 of the SFDR, provide more extensive ESG disclosures in their investment strategy and documentation than other funds.
  • The findings point to differences between document types (that is, regulatory documentation compared to marketing material), suggesting that fund managers adapt their communication based on the expected types of readers.

Tackling greenwashing is one of the key priorities in ESMA's sustainable finance strategy.

ESMA’s consultation on Guidelines on funds’ names using ESG or sustainability-related terms (discussed here) is referenced and discussed in the report. We are expecting the guidelines to issue in Q4 2023 or Q1 2024.

ESMA call for evidence on the potential impact of shortening the standard settlement cycle

ESMA launched a Call for Evidence (CfE) on the shortening of the settlement cycle, closing 15 December 2023. 

The call for evidence will help ESMA to assess the costs and benefits of a possible reduction of the settlement cycle in the European Union (EU); and identify whether any regulatory action is needed to smoothen the impact for EU market participants of the planned shortening of the settlement cycle to T+1 in other jurisdictions, such as the US. ESMA seeks input, including quantitative evidence, from all stakeholders involved in financial markets, and not only those in financial market infrastructures.

ESMA will publish and submit to the European Commission a feedback report with its main findings in the course of 2024. ESMA may provide an earlier report to the EC identifying possible regulatory actions to address the impact for EU market participants of the US move to T+1.

ESMA to launch Common Supervisory Action on MiFID II sustainability requirements 

​ESMA will launch a Common Supervisory Action (CSA) with National Competent Authorities (NCAs) on the integration of sustainability in firms' suitability assessment and product governance processes and procedures in 2024.

The goal of the CSA will be to assess the progress made by intermediaries in the application of the key sustainability requirements, which entered into application in 2022 following the amendments to the MiFID II Delegated Acts.

The CSA will cover the following aspects:

  • how firms collect information on their clients' “sustainability preferences"
  • which arrangements firms have put in place to understand and correctly categorise investment products with sustainability factors for the purpose of the suitability assessment
  • how firms ensure the suitability of an investment with respect to sustainability (including the use of a “portfolio approach")
  • how firms specify any sustainability-related objectives a product is compatible with as part of the target market assessment of the investment product

ESMA believes this initiative, and the related sharing of practices across NCAs, will help ensure consistent application of EU rules and enhance the protection of investors in line with ESMA's objectives.

The CSA follows ESMA's recent update of two sets of guidelines on suitability and product governance, ESMA and the NCAs will carry out the CSA during 2024.

DG FISMA workshop on the evolution of the Sustainability Finance Disclosure Regulation

The European Commission launched an assessment of the SFDR in order to ensure legal certainty and that the SFDR plays its part in tackling greenwashing (discussed in our September bulletin).

As part of this assessment, and to accompany a targeted consultation and a public consultation, the Directorate-General for Financial Stability, Financial Services and Capital Markets Union (DG FISMA) organised a high-level online workshop. The event was opened by Commissioner Mairead McGuinness. The objective of the workshop was to discuss current challenges of the SFDR and possible ways forward for sustainability disclosures in the EU. Questions included how to ensure better coherence between the SFDR and other parts of the EU’s sustainable finance framework, how to make disclosures more effective as well as the potential introduction of product categories. You can listen to a recording of the workshop here.

AML/CFT/FS

EBA ML/TF Risk Factors Guidelines. The guidelines were revised to include (among other things) new guidance on ML/TF risk assessments, customer due diligence for beneficial owners and compliance with the provisions on enhanced customer due diligence related to high-risk third countries. The revised version applies from 3 November 2023.

Withdrawal of recognition decision of JSE Clear, a central counterparty (CCP) established in South Africa. ESMA has withdrawn, as required by EMIR, the recognition decision of JSE Clear, a central counterparty (“CCP”) established in South Africa.

This withdrawal follows the addition of South Africa, by the European Commission, to the list of high-risk third countries presenting strategic deficiencies in their national anti-money laundering and counter financing of terrorism regime, on 16 July 2023. 

In order to minimise potential market disruption, ESMA has provided for an adaptation period of three months. The withdrawal of recognition decision will therefore enter into effect on 29 December 2023. From that date, the CCP concerned will no longer be permitted to provide clearing services to clearing members or trading venues established in the EU.

ESMA has also updated its list of recognised third-country central counterparties (TC CCPs).

For more information please contact a member of the Asset Management & Investment Funds team.

Date published: 24 October 2023