_The joint committee of the three European Supervisory Authorities (EBA, EIOPA and ESMA together, the “ESAs”) have issued a Consultation Paper seeking input on proposed Environmental, Social and Governance (ESG) disclosure standards for financial market participants, advisers and products.
These standards have been developed under the EU Regulation on sustainability-related disclosures in the financial services sector (the “Disclosure Regulation”), which you can read more about here.
The aims of these standards are to:
- strengthen protection for end investors;
- improve the disclosures to investors from a broad range of financial market participants and financial advisers; and
- improve the disclosures to investors regarding financial products.
As we explained previously, the Disclosure Regulation includes a provision for the ESAs to develop Regulatory Technical Standards (“RTS”) on the content, methodology and presentation of ESG disclosures both at entity-level and at product-level (see below). The RTS will be published by the end of 2020, with the first provisions of the Disclosure Regulation applying from 10 March 2021.
The consultation paper includes draft RTS language, which makes up 39 of the 91 pages. Note that the Disclosure Regulation itself only runs to 16 pages, but the consultation paper goes further and includes proposals under the Regulation on the establishment of a framework to facilitate sustainable investment (the “Taxonomy Regulation”) under the do no significantly harm (“DNSH”) principle. The text of the Taxonomy Regulation is expected to be adopted by the European Parliament in due course and will then be published in the Official Journal of the EU.
As we explained previously, the Disclosure Regulation includes entity and product-level disclosures, with the entity-level requirements coming into force initially. Entities in the Disclosure Regulation are described as financial market participants, which is a broad term that captures UCITS/AIFs, their managers, VC funds, insurance-based investment products, manufacturers of pension products and credit institutions; and additional provisions capture financial advisers, which is also a very broad definition.
Where firms opt or are required to consider principal adverse impacts that investment decisions have on sustainability factors, these should be disclosed on the website of the entity, and the proposals set out rules for how this public disclosure should be done (note that where they do not consider them, a disclosure of this fact must also be made). The disclosure should take the form of a statement on due diligence policies with respect to the adverse impacts of investment decisions on sustainability factors, showing how investments adversely impact indicators in relation to:
- climate and the environment; and
- social and employee matters, respect for human rights, anti-corruption and anti-bribery matters.
The sustainability characteristics or objectives of financial products should be disclosed in the pre-contractual (i.e. prospectus/PPM) and periodic reporting documentation and on the product’s website. The proposals included in the draft RTS indicate the rules for how this disclosure should be carried out in order to ensure transparency on how these products meet their sustainability characteristics or objectives. They also set out the additional disclosures that should be provided by products that have designated an index as a reference benchmark and suggested provisions for disclosing how a product based on sustainable investment complies with the DNSH principle.
Response deadline and next steps
The deadline for feedback on the consultation is 1 September 2020. Following the close of the consultation, the draft RTS will be finalised by the joint committee of the ESAs and submitted to the European Commission. They have until the end of December 2020 to do this.
For any enquiries about ESG implementation or the ESG regulatory landscape in Europe or Luxembourg, please do not hesitate to contact Partner, Mark Shaw.