The European Securities and Markets Authority has published its final report and technical advice to the European Commission on incorporating sustainability risks and factors into European regulation. The European Commission sought advice from ESMA and the European Insurance and Occupational Pensions Authority in July 2018 on the introduction of environmental, social and governance considerations into the Markets in Financial Instruments Directive II, the Insurance Distribution Directive, the Alternative Investment Fund Managers Directive, the Undertakings for Collective Investment in Transferable Securities Directive and the Solvency II Directive. The introduction of sustainability considerations into European regulation sits against the backdrop of the European Commission's Sustainability Action Plan, which aims to encourage sustainable investment and mitigate climate change risk in line with the 2016 Paris Agreement and UN 2030 Agenda for Sustainable Development. In response, ESMA opened consultations seeking input from stakeholders, which closed on February 19, 2019.

Key issues considered in the consultations included:

• Principles-based approach of Regulation: respondents confirmed the European Commission's principles-based approach (which avoids being overly prescriptive) was the most appropriate way to introduce environmental, social and good governance factors into the relevant regulations;
• Lack of defined terms: the lack of agreed definitions for the core concepts underlying ESG considerations was a shortcoming that should be considered by regulators; ESMA confirmed such definitions have been included in the draft Disclosure Regulation, a new draft Regulation that sets out disclosure requirements on sustainable finance; the European Parliament and Council of the European Union have agreed on the text of the draft Disclosure Regulation but it has not yet entered into force;
• Taxonomy: there was a need for a clear, overarching sustainability taxonomy that institutions subject to relevant EU legislation could use to inform compliance with new obligations; ESMA has encouraged the Commission to review terminology prior to adoption of final legislation in this area; and
• Implementation: those subject to the relevant regulation should be given sufficient time for implementation of actions in order to comply; ESMA has confirmed the adoption of legislation will be followed by a period of three to six months during which the European Parliament and Council may raise objections. It is proposed that the changes would apply 12 months after the revised legislation is published in the Official Journal of the European Union.

ESMA's technical advice will inform the Commission's approach to its proposed amendments to MiFID II, AIFMD and UCITS, together with related delegated legislation, aimed at integrating ESG considerations into advice on and management of financial instruments by institutions as well as the distribution of financial products. ESMA has used the results of the consultation to propose a series of draft amendments that incorporate ESG considerations into EU legislation. The draft amendments to MiFID II relate to provisions governing organizational requirements, risk management, conflicts of interest and product governance. The draft amendments to AIFMD and UCITS relate to organizational requirements, operating conditions and risk management. 

On January 4, 2019, the Commission published a proposed revision of the Delegated Regulation on organizational requirements for investment firms, which includes amendments aimed at ensuring investment firms take into account ESG preferences of clients. It has not yet been adopted.

View ESMA's technical advice on sustainability risks and factors in MiFID II.

View ESMA's technical advice on sustainability risks and factors in UCITS and AIFMD.

View the Commission's press release announcing political agreement on the draft Disclosure Regulation.

View the proposed revised Delegated Regulation on organizational requirements for investment firms.

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