Background Notes

The Mandate[1] the European Commission (arising from Article 8(4) of the PRIIPs Regulations) has given to the ESAs with regards to PRIIPs looks specifically at the key information document (KID) and asks the manufacturer to demonstrate (primarily in the document itself) to stakeholders and, in particular to the potential retail investor, how the environmental or social (EOS) targets are taken into account throughout the whole value chain of the investment process.

As the ESAs are asked to examine the product governance requirements and validation procedures in existing EU legislation and potential extra measures in case of shortfalls, the consultation focuses on the governance aspect of PRIIPs and the correlation between EOS disclosure and objectives attainment. The proposed gap analysis extends to suggesting minimal standards for a governance approach to EOS PRIIPs, starting from the perspective of the retail investor who wishes to generate a socially/environmentally desired impact.

Specifically, parties are invited to provide feedback on the Draft Technical Advice ‘Chapter 4’ section, which provides draft ‘Technical Advice’ (page 20) the introduction to which, subject to consultation feedback, which advises that the current product oversight and governance provisions for PRIIPs.

The KID is intended to make it easier for retail investors to compare products to each other as it must clearly set out an investment product’s aims and state when investors can get their money back, how much the product costs, what its expected returns are and the level of risk. The consultation paper acknowledges the space limitations on the current form which entail that a full description of the link between the environmental or social objectives, the product’s investment strategy and the asset selection criteria may not be feasible, and therefore directs, for a lengthier explanation in the Investment Policy Statement (IPS). The IPS should also continue to be monitored, with regular reviews and the establishment of reporting lines to responsible senior management.

Eurosif has been a very strong advocate of the inclusion of E and S consideration for retail products since its own inception. In 2004, Eurosif developed its Transparency Guidelines for the retail sector, drafted in order to maintain and increase consumer confidence in this dynamic and high growth area. The pan-European effort, developed with the support of the European Commission, was the result of a multi-stakeholder consultation that incorporated the views of the financial services community, research groups, NGOs, trade unions and others. To date, the Transparency Code represents the ‘mother framework’ for labels and standards in the SRI space and it has been transposed in France (2010) and Belgium (2013) by the respective Asset Management associations as a minimum requirement for SRI products.

Eurosif looks at PRIIPs as a powerful instrument to raise awareness amongst retail investors on Environmental and Social considerations in their investments through funds and insurance products. Article 8 (4) represents the right opportunity for mainstreaming SRI and giving easier access to a growing retail market[2], to sustainable financial products.

Due to take effect in 2018, PRIIPs, which aims at increasing the comparability of products for investors, has been subject to delay due to its underlying vision to harmonise products which are fundamentally different – namely banking, insurance and funds. The different technical requirements lead to different interpretations also when considering risks. The consideration of past performance, typically the norm in the sale of funds, has been opposed in the Parliament[3], in favour of future performance, rather the norm with life policies instead.

 

[1] Most firms providing investments or investment services to retail investors, including AIFMs and UCITS Management Companies

 

[2] According to the Eurosif study 2016, the European SRI retail market represents 22% of the total of the SRI industry in Europe (end 2015) – Eurosif SRI Study 2016, p. 52

[3] Econ Committee deliberation (01/09/2016) – http://www.europarl.europa.eu/news/en/news-room/20160830IPR40525/econ-committee-unanimously-rejects-commission%E2%80%99s-investor-protection-proposals

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