The investment fund business is continuously trying to keep up with updates, guidelines and new rules. Another major impact will soon hit the fund business. On 6 November 2023, the Council of the European Union published the final text of the amendments to the Alternative Investment Fund Managers Directive (AIFMD). The amended directive is known as “AIFMD 2.0” although the text purports to amend the AIFMD (instead of drafting a whole new directive) and introduces amendments to the Undertakings for Collective Investment in Transferable Securities Directive (Ucits).
Given the scope of amendments of the AIFMD and the constraints of this columns format, we shall point out certain new developments, without providing a proper in depth analysis. The European Commission establishes that AIFMD itself has met its main purpose: ensuring a high level of investor protection and protecting financial stability. The purpose of the amendments (as stated in the whereas of the proposal) are the harmonisation of rules for alternative investment funds which originate loans, the clarification of standards for third-party delegation, improvement of cross-border access to depositary services and the facilitation of use of liquidity management tools. All these topics seem to have regulatory gaps under the current directive.
The upcoming amendments under AIFMD 2.0 seem rather like an “evolution of rules, and no revolution in itself”, which most probably ties in with the general attempt of the European Commission to allow for a smooth market transition into the new and upcoming (amended) regime.
ESMA publishes “Concepts of Sustainable Investments and Environmentally Sustainable Activities in the EU Sustainable Finance Framework
The European Securities and Markets Association (Esma) continues to focus on sustainability issues. On 22 November 2023, Esma published the document: “Concepts of sustainable investments and environmentally sustainable activities in the EU Sustainable Finance framework” which explains the concept of sustainability as it must be used in the EU Sustainable Finance (SF) framework. This document discusses and compares the concept of sustainability in the EU Taxonomy Regulation (TR) and the Sustainable Finance Disclosure Directive (SFRD) framework. Furthermore, on the same date ESMA published the document “Do No Significant Harm” (DNSH) definitions and criteria across the EU sustainable Finance Framework”.
In brief
As to the EU Taxonomy: this regulation defines sustainable investment as “an investment in one or several economic activities that qualify as environmentally sustainable”. A sustainable investment is “Taxonomy aligned” if:
- it contributes substantially to one or more of the six environmental objectives established by article 3 of the TR;
- it does not significantly harm any of those environmental objectives;
- it is carried out in compliance with minimum safeguards; and
- complies with technical screening criteria (TSCs) as established by the TR.
As to the SFDR, this regulation defined “sustainable investment” as:
- an investment in an economic activity that contributes to an environmental or social objective;
- the investment does not significantly harm any environmental or social objective; and
- investee companies follow good governance practices in particular with respect of sound management structures, employee relations, remuneration of staff and tax compliance.
Looking at the criteria for sustainable investments in both TR and SFDR, it appears that the definitions and concepts are not completely aligned, which in turn raises the question as to the ratio legis behind this.
As to which stakeholders must apply the concepts of taxonomy (“environmentally sustainable”) the TR covers financial and non-financial undertakings (as part of the non-financial reporting) whereas the scope of SFDR is limited to financial market participants only. With respect to criteria for application and disclosure of concepts of sustainable investments, the TSCs to the TR contain sector-specific and science-based criteria, whereas the SFDR does not include specific criteria, thresholds or targets for assessment of sustainable investments (other than specific disclosure requirements under articles 8 and 9 thereof).
More or less, the same goes for substantial contribution and the principles of DNSH. The TSCs to the TR refer to specific targets and thresholds (or requirements), whereas the SFDR framework does not prescribe such specific targets and thresholds, but rather states that sustainable investments must at least abide by three criteria of article 2(17) of SFDR, being contribution, DNSH and good governance.
In respect of DNSH, the main note is that in the TR, DNSH is applied at the level of economic activity and that SFDR introduced this principle at investments level, i.e. as one of the three elements for the assessment of sustainable investments which also includes an assessment on the overall impact of the financial product on environment and society.
Tom Loonen is professor of financial law VU University Amsterdam and special counsel Pinsent Masons Netherlands. Jan Saalfrank is an investment funds partner at Pinsent Masons Luxembourg. Lous Vervuurt is a lawyer at Pinsent Masons Netherlands and advises clients on financial regulation and anti-money laundering compliance. The law firm is a knowledge partner of Investment Officer.