The Alternative Investment Management Association Limited (AIMA) welcomes the opportunity to respond to the proposal for a delegated regulation amending Regulation (EU) 2017/565 (‘MiFIR’) supplementing Directive 2014/65/EU (‘MiFID II’) as regards organisational requirements and operating conditions for investment firms and defined terms for the purposes of that Directive (the ‘draft delegated regulation’).
Investor interest in responsible investment and consideration of environmental, social and governance (‘ESG’) factors with respect to their investment portfolios has been increasing over recent years. The reflection around the introduction of ESG considerations in MiFID II’s suitability requirements is appropriate and seems to follow an already existing, and growing, trend.
As underlined in our recent survey on responsible investment, a significant number of alternative investment fund managers are now focusing on how to adopt responsible investment while continuing to deliver the strong risk-adjusted returns that their clients have come to expect. This trend is led by a growing demand from investors who are increasingly looking for portfolio solutions that, as well as minimising risks and maximising returns, also take governance, social and environmental concerns into account.
As this activity is getting more and more important among our members, we have had the opportunity to also appreciate the complexity and subjectivity of mainstream concepts such as “sustainability”, “ESG considerations” or “green investments”. These concepts are very often linked to a particular perception which can differ from one market participant to another.
With this background in mind, our main comments on the draft delegated regulation are as follows and detailed in the letter attached:
- The consideration of ESG factors should be client-driven rather than imposed by regulation
The investment management industry is based on an agency business model, whereby the investment firms acts as the agent of the client (or principal) and its primary duty is to protect and enhance the client’s assets. Any additional or alternative considerations other than the protection and growth of one’s clients’ assets in line with the stated investment and financial objectives should be prompted by the client rather than by external regulatory constraints.
- Financial returns obtained in line with investment goals should be a primary consideration in suitability assessments where there is lack of clarity around hierarchy of objectives
The text of the delegated regulation should clarify that when considering client investment objectives and ESG preferences, the investment objectives in the form of financial returns relevant to the circumstances and the goals of the client should be the primary factor to consider when providing investment advice or portfolio management services.
- Sustainable investments should not be required to be defined solely or predominantly by the reference to the EU taxonomy or EU prescriptive lists
We would welcome a clarification that the EU taxonomy and other prescriptive descriptions be used only as examples of sustainable investment that the client could choose to refer to, or to ignore.
- Investment firms should be free not to offer ESG related investment strategies
To the extent that ESG factors do not have a bearing on financial performance and the risk profile of the various investment strategies, investment firms ought to be able to offer services that do not explicitly take ESG factors into account. This is already suggested by the proposed text which states that clients may not have any ESG preferences.
- Consideration of ESG factors by investment firms should be done on a proportionate basis
Investment firms ought to conduct their business in relation to ESG considerations in a manner which is appropriate and proportionate to the nature, scale and size of their business.
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