On 1 August 2023, the Dutch Authority for the Financial Markets (Autoriteit Financiële Markten, the AFM) published an exploratory study into the sustainability risk management of Dutch alternative investment fund managers (AIFMs).

The study was conducted due to changes made to the UCITS Directive (Directive 2009/65/EC) and the AIFMD Delegated Regulation (Commission Delegated Regulation (EU) No 231/2013). These changes now require AIFMs to do two key things:

  1. integrate sustainability risks into their processes, systems and internal controls; and
  2. retain the necessary resources and expertise for the effective integration and analysis of sustainability risks.

The purpose of the explanatory study was to understand how AIFMs integrate sustainability aspects in their organisation and which choices they are making about it. The AFM identified three general observations and five specific insights regarding the management of sustainability risk on the basis of information that it received from the fifteen AIFMs that participated in the study.

General observations

  1. There are major differences in the availability and quality of data about sustainability matters. While there has been an increase in such data recently, the AFM highlights notable differences in the data acquired by AIFMs, both directly from portfolio companies and indirectly from third-party providers. This can adversely affect the ability to compare between investment funds.
  2. The difference between sustainability objectives and sustainability risks is not clear for each AIFM.
    The AFM observes that there is some confusion among AIFMs as to the determination of sustainability objectives (e.g. the achievements of certain targets such as CO2-emission targets) and the identification of sustainability risks (e.g. the use of risk limits to avoid negative impacts on the AIFM). According to the AFM, it is important to differentiate between sustainability objectives and sustainability risks. Failing to do so could result in not all relevant sustainability risks being identified. When risks go unnoticed, they are not effectively addressed, leading to increased exposure for the AIFM.
  3. The majority of AIFMs integrated processes regarding sustainability risk identification to a greater or lesser extent.
    The AFM points out that it is advisable that AIFMs identify sustainability risks on an ongoing basis, in addition to the due diligence process that takes place prior to an investment. In addition, it is advisable to take adequate measures to manage sustainability risks. After all, circumstances are not static and changes, for instance in government policy, can result in new sustainability risks or affect the extent of existing risks.

Specific insights

  1. It differs per AIFM how the function which is end-responsible for the management of sustainability risks is organised.
    The AFM observes that some AIFMs established a sustainability committee while others have not. In addition, the mandate of such sustainability committees varies per AIFM. The AFM points out that it is important for AIFMs to assign the (end-)responsibility in relation to the integration and management of sustainability risks to a certain function within the organisation of the AIFM.
  2. The majority of AIFMs use the definition of sustainability risk as laid down in the Sustainable Finance Disclosure Regulation (SFDR). Given the fact that the concept of sustainability risk can be defined in many different ways, it is important that the same definition of ‘sustainability risk’ is used within the AIFM.
  3. The majority of AIFMs established a risk appetite for sustainability risks.
    The risk appetite is mainly expressed in a qualitative manner (e.g. high-medium-low). Determining the risk appetite with regard to sustainability risk, and monitoring the risk limits, benefits risk management. The AFM suggests that incorporating sustainability risk into an organisation’s risk appetite and tracking it using clear (ideally quantitative) benchmarks will help ensure clear management of sustainability risk within the AIFM’s operations.
  4. Stress-testing and stress-scenarios are not widely applied in the process of managing sustainability risks.
    The AFM points out the importance of AIFMs adequately managing all (material) risks, including sustainability risk. Performing scenario-analysis and stress testing as part of the risk management process is a useful way to better understand the implications on sustainability risk on outstanding investments.
  5. Sustainability limits are being monitored and exceeding such limits has hardly occurred.
    Most of the AIFMs established sustainability limits and the monitoring thereof forms an integral part of their risk management structure. To determine the current risk status of the AIFM, it is important that AIFMs monitor the identified risks, through established risk limits, and report on this periodically. Monitoring and controlling risk limits is less easy to perform if these limits are described qualitatively and it is not made clear to what risks they exactly relate.

The AFM acknowledges that the amendments to the UCITS Directive and the AIFMD Delegated Regulation have recently taken effect and do not provide specific details on how to meet the relevant requirements. In the upcoming period, the AFM will continue to pay attention to how AIFMs manage sustainability risk, including the use of data from external providers. In addition, the AFM points out that the European Securities and Markets Authority has announced that further research will be carried out into AIFMs’ management of sustainability risks.