On 8 June 2020, the European Commission published the long-awaited draft level 2 measures incorporating sustainability issues and considerations into the EU financial services regulatory framework, including the UCITS Directive, the Alternative Investment Fund Managers Directive (AIFMD), MiFID II, the Solvency II Directive, and the Insurance Distribution Directive (IDD). The draft delegated acts also aim to clarify a number of implications resulting from the Regulation on sustainability-related disclosures in the financial services sector (Disclosure Regulation).

The texts are based on the technical advice submitted by the European Securities and Markets Authority (ESMA) in April 2019. Together with the publication of the draft delegated acts, the Commission has launched a 4-week consultation on each of the draft texts, meaning that stakeholders can provide comments by 6 July 2020. If adopted, the draft delegated acts will be subject to scrutiny by the European Parliament and the Council. The amended rules will apply from 12 months after their publication in the Official Journal of the EU.

The sections below provide an overview of the proposed requirements, focusing on investment firms and asset managers.


Product governance

The draft delegated act introduces a new definition of “sustainability preferences” into Delegated Directive 2017/593, referring to a client’s or potential client’s choice as to whether a financial instrument that has as its objective sustainable investments or a financial instrument that promotes environmental or social characteristics as defined in the Disclosure Regulation should be integrated into their investment strategy. In addition, the definitions of “sustainability risks” and “sustainability factors” under the Disclosure Regulation would be introduced into the Delegated Directive.

The draft delegated act sets out the obligation for investment firms to consider any preference for sustainable products as part of the clients’ needs, characteristics and objectives if these investment firms identify at a sufficiently granular level the potential target market for financial instruments and the types of clients for whom they are compatible. When carrying out this assessment, investment firms would be obliged to examine whether the financial instrument’s sustainability characteristics are in line with the target market. This will also need to be incorporated more generally into product governance arrangements.

The draft delegated act also introduces the obligation for firms to make sure that the financial instrument remains consistent with the needs, characteristics and objectives, including any preferences for sustainable products, of the target market when regularly assessing the financial instruments they manufacture. If an inconsistency between the product and the target market is detected, firms should reconsider the target market and/or product governance arrangements of the given product.

Organisational requirements

The draft delegated act amending Delegated Regulation 2017/565 on organisational requirements also introduces the definitions of “sustainability preferences”, “sustainability risks” and “sustainability factors” into the Delegated Regulation. Under the draft delegated act, investment firms will be required to consider sustainability risks when establishing, implementing and maintaining risk management procedures which identify the risks relating to the firm’s activities, processes and systems.

When conducting the assessment of sustainability and providing suitability reports under Article 54, investment firms would under the draft rules need to take into account in the selection process to recommend financial products to their clients, including risks, costs and complexity of the financial instruments, and including any sustainability factors. The draft delegated act also requires firms to prepare a report for the client explaining how the investment recommendation meets their sustainability preferences alongside their investment objectives, risk profile and capacity for loss bearing.


As in the MiFID draft delegated acts, the draft Commission Regulation amending the UCITS Delegated Directive (2010/43/EU) [link] and the draft Commission Regulation amending the AIFMD Delegated Regulation ((EU) 231/2013) introduce the definitions of “sustainability preferences”, “sustainability risks” and “sustainability factors” definitions into the level 2 measures, as well as the concept of ‘material adverse impact’ on the value of investments.

If endorsed by the Parliament and the Council, management companies and alternative investment fund managers (AIFMs) will be required to consider sustainability risks when complying with the organisational requirements and retain the necessary resources and expertise for the effective integration of sustainability risks. In addition, senior management of the management company or AIFM will be responsible for the integration of sustainability risks, and conflicts of interest will need to include those that may arise as a result of sustainability risks.

Due diligence requirements would also need to include the consideration of sustainability risks. In the event that management companies or AIFMs consider principal adverse impacts of investment decisions on sustainability factors, this would need to be considered in undertaking due diligence. In addition, risk management policies would need to consider exposures of the UCITS or AIF to sustainability risks.