ALFI position paper on the calibration of the depositary duties as regards the monitoring of ESG investments

On 11 September 2023, ALFI released a position paper addressing the calibration of depositary duties in the context of monitoring ESG investments. This paper was prompted by §46 of the ESMA supervisory briefing published in May 2022 concerning sustainability risks and disclosures in investment management (ESMA34-45-1427).
The document, authored by ALFI’s Depositary Bank Forum Steering Committee and ALFI’s ad hoc ESG investment limits working group, outlines their interpretation of depositary duties in monitoring ESG investments. It lacks regulatory validation and does not absolve stakeholders of complying with investment monitoring rules. The document is not advisory, provided without warranties, and not legally binding. It may be amended without prior notice to incorporate new material. Of note, ALFI aims to update it, but is not legally obligated to do so.
The key principles outlined in the ALFI position paper are as follows:
1. Depositaries and SFDR: Depositaries are not considered „financial market participants“ under the SFDR, and thus SFDR does not apply to them.
2. Oversight and Complex Limits: Depositaries should oversee simple limits and, if necessary, apply procedures for complex limits when they are deemed non-simple. Detailed procedures are elaborated in the paper.
3. Data Availability: When quantitative ESG-related limit checks cannot be performed due to a lack of taxonomy or sustainable investment data, depositaries should obtain the necessary information from the IFMs.
4. ESG Limits as Due Diligence: Depositaries are advised to include ESG-related limits monitoring as part of their due diligence on IFMs.
5. Classification of Funds: Depositaries are not responsible for classifying funds as Article 6, 8, or 9 under SFDR.
More specifically, the background section provides in ALFI’s position paper outlines ESMA’s supervisory briefing from May 2022, emphasizing the need for consistent practices among NCAs. ALFI notes that the scope is limited to depositary duties, excluding IFM duties.
The section on regular depositary duties highlights the separation of depositary roles from investment management functions, the importance of risk assessments on IFMs‘ internal control robustness, and the distinction between ESG-related and other investment restrictions. The calibration of depositary duties regarding ESG-related limits is detailed, covering scenarios with simple and complex limits. It emphasizes the need for depositary oversight while respecting the IFM’s internal controls and processes.
The availability of information section underscores the importance of written procedures and due diligence to facilitate the sharing of ESG criteria and information between depositaries and IFMs.
Finally, the section on depositary liability reiterates that depositaries are not financial market participants under SFDR and that IFMs remain responsible for ensuring compliance with fund offering documentation. Depositaries are not tasked with verifying SFDR classification but must be informed of any identified breaches.