knowledge 27 February 2020 |

Sustainable Finance:  New Disclosure Requirements

Who is in-scope?

The Regulation applies to a broad range of:

• fund managers, pension providers, insurance-based investment product providers, MiFID investment firms and credit institutions.  These are referred to as “financial market participants”; and
• financial advisers, including certain insurance intermediaries and providers of investment advice.  These are referred to as “financial advisers”.

The complete list of in-scope entities, based on the definitions used in the Regulation, is set out in the schedule.  The Regulation includes limited exemptions for:

• (subject to a Member State not deciding otherwise) insurance intermediaries which provide insurance advice with regard to “IBIPs” (insurance undertakings which make available insurance-based investment product); and
• investment firms which provide investment advice, provided they employ fewer than three persons.

When will the new obligations take effect?

The Regulation will apply generally from 10 March 2021, with certain obligations taking effect later, presumably to accommodate the development and adoption of the related regulatory technical standards.  Compliance with the requirements of the Regulation will be monitored by the relevant competent authorities, being the Central Bank of Ireland in an Irish context.

What are the new disclosure requirements?

Broadly summarised, the Regulation seeks to lay down harmonised rules on transparency with a view to promoting the integration of sustainability risks into investment processes and the disclosure of such risks to investors.  The Regulation defines a “sustainability risk” as:  “an environmental, social or governance event or condition that, if it occurs, could cause an actual or a potential material negative impact on the value of an investment”. 

Financial market participants (“FMPs”) and financial advisers have similar but different obligations.

Financial market participants - websites

FMPs must publish on their websites:

Investment Policies:  information about their policies on the integration of sustainability risks into their investment decision-making process;

Entity-level Considerations:  either a statement:

• on the due diligence policies they use to consider the principal adverse impacts of investment decisions on “sustainability factors” (ie environmental, social or employee issues, human rights, anti-corruption and anti-bribery matters), or
• setting out clear reasons why they do not consider such impacts (and whether they intend to do so at a future date);²

Remuneration Policies:  information on how the remuneration policies (where required under separate existing sectoral legislation eg the UCITS Directive³) are consistent with the integration of sustainability risks;

ESG Products:  where an FMP makes available a product that promotes environmental or social characteristics (“ESG characteristics”), or has sustainable investment or carbon emission reduction as an objective (an “ESG objective”), the following information in a prominent place:

• a description of the relevant ESG characteristics and/or ESG objective of the product;
• the methodologies used to asses, measure and monitor the ESG characteristics of the product and/or impact of the product on the ESG objective;
• how the ESG characteristics are met;
• where an index is designated as a reference benchmark for ESG characteristics:  whether and how the index is consistent with those characteristics, and where the methodology for the index can be found;
• where an index is designated as a reference benchmark for an ESG objective:  information on how the index is aligned with the objective, an explanation on how that index differs from a broad market index and where the methodology for the designated index can be found; and
• where no index is designated as a reference benchmark for an ESG objective, an explanation of how that objective is to be attained.

Financial market participants - pre-contractual disclosures

FMPs must include descriptions of the following in pre-contractual disclosures:

• the manner in which sustainability risks are integrated into their investment decisions;
• the results of an assessment of the likely impacts of sustainability risks on the financial products they make available.

Where a financial product promotes ESG characteristics, the disclosures must include information on:

• how those characteristics are met; and
• whether and how any benchmark index referred to, is consistent with those characteristics.

Similar requirements arise in relation to financial products with ESG objectives.

These disclosures are required to be added to the disclosures and information already provided to clients under existing sectoral legislation (eg the prospectus required under the UCITS Directive).

Financial advisers - websites

Financial advisers must publish on their websites:

Investment Policies:  information about their policies on the integration of sustainability risks in their investment advice or insurance advice;

Entity-level Considerations: 

• information as to whether, taking account of their activities and financial products, they consider in their investment advice or insurance advice the principal adverse impacts on sustainability factors; or
• reasons why they do not consider such adverse impacts (and whether they intend to do so at a future date);

Remuneration Policies:  information on how the remuneration policies (where required under separate existing sectoral legislation eg MiFID II⁴) are consistent with the integration of sustainability risks.

Financial advisers - pre-contractual disclosures

Financial advisers must include descriptions of the following in pre-contractual disclosures:

• the manner in which sustainability risks are integrated into their investment or insurance advice; and
• the results of the assessment of the likely impacts of sustainability risks on the financial products they advise on.

Where a financial product promotes ESG characteristics, the disclosures must include information on:

• how those characteristics are met; and
• whether and how any benchmark index referred to, is consistent with those characteristics.

Similar requirements arise in relation to a financial product with an ESG objective.

These disclosures are required to be added to the disclosures and information already provided to clients under existing sectoral legislation (eg MiFID II).

Regulatory technical standards

While the Regulations do set out some specific compliance requirements, much of the detail of how to address the obligations created by the Regulation will ultimately be prescribed by the corresponding regulatory technical standards.  The three European Supervisory Authorities (the “ESAs”)⁵ are tasked with producing drafts of these for adoption by the European Commission, prior to the date on which the obligations under the Regulation take effect.

Comment

It seems clear that the European legislative landscape will increasingly involve ESG-related monitoring and reporting obligations for all involved in the world of finance.  The Regulation is just one (important) part of the Commission’s Action Plan on Sustainable Finance, which also includes amendments to the Benchmark Regulation⁶ and the proposed development of an EU-wide classification system to underpin ESG characterisations.  As the European Union steps forward to lead global efforts on climate change mitigation, it will expect the finance industry to do likewise.

Schedule

 

“Financial market participant” means:
(a)	an insurance undertaking which makes available an insurance‐based investment product (IBIP);
(b)	an investment firm which provides portfolio management;
(c)	an institution for occupational retirement provision (IORP);
(d)	a manufacturer of a pension product;
(e)	an alternative investment fund manager (AIFM);
(f)	a pan‐European personal pension product (PEPP) provider;
(g)	a manager of a qualifying venture capital fund registered in accordance with Article 14 of Regulation (EU) No 345/2013;
(h)	a manager of a qualifying social entrepreneurship fund registered in accordance with Article 15 of Regulation (EU) No 346/2013;
(i)	a management company of an undertaking for collective investment in transferable securities (UCITS management company); or
(j)	a credit institution which provides portfolio management.

 

“Financial adviser” means:
(a)	an insurance intermediary which provides insurance advice with regard to IBIPs;
(b)	an insurance undertaking which provides insurance advice with regard to IBIPs;
(c)	a credit institution which provides investment advice;
(d)	an investment firm which provides investment advice;
(e)	an AIFM which provides investment advice in accordance with point (b)(i) of Article 6(4) of Directive 2011/61/EU; or
(f)	a UCITS management company which provides investment advice in accordance with point (b)(i) of Article 6(3) of Directive 2009/65/EC.

 

Note:  Member States may also decide to apply the Regulation to the manufacturers of certain pension products relating to national social security schemes.⁷ Member States must notify the European Commission and the ESAs if they decide to do so.