Sustainability risk-related legislative update impacting Alternative Investment Fund Managers

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There has been a major emphasis on empowering European Supervisory Authorities and the regulators in line with the European Commission’s action plan of “Financing Sustainable Growth”.

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Responsible and sustainable investment has become an important consideration for investment firms with ESG metrics fast becoming key performance indicators for investing. Effective from 1st August 2022, Commission Delegated Regulation (EU) 2021/1255 (“new regulation”) requires all Alternative Investment Fund Managers (“AIFMs”) to integrate sustainability risks into the management of its Alternative Investment Funds (AIFs).

The greater emphasis on sustainability in investing is a crucial factor for AIFMs to keep abreast of amidst increasing pressure from investors and the regulation. Sustainability risks and factors are now expected to be at the heart of the decision-making in both the pre and post trade process. While previously not warranting prioritisation, ESG has become a key component for fund managers to consider.

Key Changes for AIFMs

As a result of the Sustainable Finance Disclosure Regulation (SFDR), AIFMs are now obligated to include the two additional concepts into their modus operandi - sustainability risks and sustainability factors. The new regulation brings in the holistic integration of these sustainability concepts across the asset management industry. It is a fundamental change for AIFMs, with the biggest challenge being for AIFMS to able to identify and assess the materiality, manage and monitor both sustainability risks (and adverse impacts on sustainability factors where appropriate) to meet an AIFM’s obligations under this new regulation.

 Some areas to highlight where the new regulation has impacted the AIFM space include:

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Stages of Investment

The SFDR brought in transparency obligations for AIFMs to publish how their investment process has taken into consideration sustainability on their websites and in their annual accounts. However, the new regulation goes one step further and operationalises the integration of sustainability risk and factors not just into an AIFM’s overall organisation but throughout its product lifecycle. It obliges an AIFM to account for sustainability risks in its due diligence for selecting as well as ongoing monitoring of its investments.

Next Steps

Financing Sustainable Growth and Sustainability is a key 2022 focus for the regulatory authorities. Alternative Investment Fund Managers need to be aware of these changes and ensure that the funds they are managing are compliant with the ever-increasing obligations in a move towards sustainability. It should be noted similar changes are on the horizon for MIFID firms and UCITs.

How Grant Thornton can help

Grant Thornton’s Financial Services Risk, Consulting and Advisory teams are comprised of dedicated experts who are experienced in supporting investment firms with a variety of regulatory and ESG challenges.

In particular, our industry-leading Prudential Risk team understands that regulation continues to drive the strategic agenda for financial and non-financial institutions working together with our sustainability specialists, we believe our skillsets combine the best of scientific knowledge with real world experience to deliver practical, actionable solutions. We specialise in assisting clients across the financial services sector in navigating through the maze of regulation and support clients to identify regulatory obligations and work towards full compliance balanced with your business needs.