knowledge 13 July 2023 |

ESMA sets out expectations for sustainability disclosures in prospectuses

Introduction

On 11 July 2023, ESMA issued a public statement (here) setting out its expectations with respect to sustainability-related disclosures that should under current EU prospectus legislation be included in prospectuses for securities that have sustainability features.

The public statement makes it clear that while it is addressed to national competent authorities (“NCAs”), its contents should be taken into account by issuers and advisors when drawing up prospectuses, including sustainability-related disclosures.

Background

In issuing its public statement, ESMA notes that while certain other legislative proposals, such as the proposed Listing Regulation¹ (here) and the proposed Regulation on European Green Bonds² (here), are expected to include disclosure requirements relating to sustainability matters, given the importance of sustainability to investors, ESMA is issuing the statement to promote coordinated action by the NCAs.

The statement relates only to the applicable disclosure requirements under the Prospectus Regulation³ (here) and does not add any additional disclosure requirements. It is also expressed to be without prejudice to any additional disclosures that may be required by the future Listing Regulation.  

Existing basis for disclosures

ESMA leverages the requirements of Article 6(1) of the Prospectus Regulation in outlining its expectation that material sustainability-related disclosure is included in equity and non-equity prospectuses as well as final terms.

Article 6(1) provides that:

“… a prospectus shall contain the necessary information which is material to an investor for making an informed assessment of:

1. the assets and liabilities, profits and losses, financial position, and prospects of the issuer and any guarantor;
2. the rights attaching to the securities; and
3. the reasons for the issuance and its impact on the issuer.”

In addition, ESMA points to the reference to sustainability-related disclosures in prospectuses contained in Recital 54 of the Prospectus Regulation, which states that “[…] environmental, social and governance circumstances can also constitute specific and material risks for the issuer and its securities and, in that case, should be disclosed”.

In this context, ESMA reminds issuers and their advisors to consider sustainability-related matters when preparing prospectuses to the extent that the effects of those matters are material, even if the disclosure requirements in Commission Delegated Regulation 2019/980 (the “PR Delegated Act”) (here) do not explicitly refer to sustainability-related matters. The type of sustainability information required to satisfy Article 6(1) of the Prospectus Regulation will depend on the materiality of the information to an investor. The circumstances of the issuer and the type of securities in question are critical to determining which information will be material.

In addition, ESMA recommends that issuers take the following points into consideration in relation to sustainability disclosures in prospectuses:

1. Basis for statements:  To help to ensure that the information in the prospectus is as objective as possible, issuers should provide the basis for any statements concerning their sustainability profile or that of the securities they issue including:
   
   (i) by stating that the issuer or securities adhere to a specific market standard or label and including the material information about that standard or label in the prospectus
   (ii) referring to the underlying data and assumptions; and/or
   (iii) by referring to any research or analysis by third parties.
    
2. Restrictions on disclaimers: ESMA considers that sustainability-related disclaimers should not be used to excuse non-performance of factors over which the issuer exercises control. For example, a disclaimer stating that the proceeds of the offering may be invested contrary to the criteria for project selection set out in a prospectus is a factor over which an issuer exercises control and should not be included as a disclaimer.
    
3. Comprehensibility of disclosures: The comprehensibility of any sustainability disclosure should be ensured by complying with the relevant requirements set out in Article 37(1) of the PR Delegated Act.  In particular, the prospectus should clearly define the components of mathematical formulas and, where applicable, clearly describe the product structure. Any technical terminology relating to sustainability should also be adequately defined.

Key points for issuers of non-equity securities to consider

Specifically with respect to non-equity securities advertised as taking into account a specific ESG component or pursuing ESG objectives, such as ‘use of proceeds’ bonds (e.g. green or social bonds) and ‘sustainability-linked’ bonds, ESMA outlined the following expectations with respect to disclosures to be contained in prospectuses and final terms:

1. ESMA expects prospectus disclosures to be made: ESMA expects prospectuses and final terms for these types of securities to include the disclosures required pursuant to Article 6(1) of the Prospectus Regulation and the relevant annexes to PR Delegated Act.
    
2. Necessary disclosure will depend on characteristics: The necessary disclosure will depend on the characteristics of the non-equity securities in question so that issuers and their advisers are encouraged to reach out to ESMA and NCAs if there are uncertainties about the required disclosure.
    
3. Expectations for ‘use of proceeds’ bonds:  ESMA expects disclosure about:
   (i) the use and the management of the proceeds; and
   (ii) information enabling investors to assess the sustainability ambition underpinning the process for project evaluation and selection.
   (iii) This could include, for example, a summary of the material information from an issuer’s ‘green bond framework’ or reference to the legislation (that will be) used to determine the sustainability profile of the projects (if any).
    
4. Expectations for ‘sustainability-linked’ bonds: ESMA expects information to be included in the prospectus about:
   (i) the selected key performance indicator(s) (“KPIs”);
   (ii) the sustainability performance target(s) (“SPTs”); and
   (iii) information enabling investors to assess the consistency of the KPIs and its associated SPTs with the relevant sector-specific science-based targets (if any) and the issuer’s sustainability strategy.
    
5. Post-issuance information: In prospectuses concerning ‘use of proceeds’ bonds or ‘sustainability-linked’ bonds, ESMA recommends that issuers disclose in their prospectus whether they intend to provide post-issuance information. This disclosure should include an indication of what information will be reported and where it can be obtained. For example, an issuer could include the URL to the website where investors will be able to access the post-issuance information.

To assist issuers and their advisers as well as NCAs in determining which information should be included in a prospectus, ESMA included a table at the end of its statement setting out the disclosures that ESMA expects in relation to these types of securities.   We have reproduced this table at the end of this briefing.

Equity prospectuses and consistency with non-financial reporting

ESMA notes that to the extent that sustainability-related disclosures published in an issuer’s non-financial reporting in accordance with the Non-Financial Reporting Directive (“NFRD”)⁴ (here) and the future sustainability reporting under the Corporate Sustainability Reporting Directive (“CSRD”)⁵ (here) are material in the context of Article 6(1) of the Prospectus Regulation, issuers should include those disclosures in equity prospectuses.

The statement also reminds issuers and their advisers of the 2021 and 2022 European Common Enforcement Priorities (here and here) concerning issuers’ annual financial reports. These publications contain recommendations that disclosures be included in issuers’ annual financial statements, as well as their management reports and non-financial statements. Issuers should also take these recommendations into account when including information from their non-financial reporting in a prospectus given the importance of the consistency in the information provided to investors.

Consistency with advertisements

The statement notes that ESMA and NCAs have observed that some issuers include sustainability-related disclosures in their advertisements that are not included in their prospectus and commented that the importance of the sustainability-related disclosures in an advertisement for investors is an indicator of its materiality in which case, it should first be included in their prospectus (for example, through a supplement).  This approach would also ensure the consistency of the information in the advertisement with the information in the prospectus, as required under the Prospectus Regulation.

Commentary

The publication by ESMA of this public statement is significant.  Although there is currently no specific legal framework relating to prospectus disclosure for sustainable bonds in Europe, this statement sets out ESMA’s interpretation of how the existing well-developed EU regulatory regime for prospectuses applies to sustainable bonds.  It is notable in this context that it has moved to publish this statement ahead of any specific requirements which may be introduced under the proposed Listing Regulation.

To date, issuers and underwriters have adopted different approaches when making disclosures in prospectuses.  For example, for ‘use of proceeds’ bonds, a common approach for the use of proceeds statement has been to simply state that an amount equal to the net proceeds of the relevant issuance will or is intended to be used to finance/refinance eligible projects in accordance with a framework document which has been developed by the issuer.  A hyperlink to the framework is also usually included with an accompanying statement that the relevant framework does not form part of the prospectus.

Different views have been expressed in the market on this approach.  While the sustainability features of securities do not usually affect the credit analysis, investors are investing in a green, social or sustainable bond which is being marketed as such and that the investor presentation and marketing materials will contain additional information referencing the framework.  For this reason, some issuers include additional information on the framework document in their prospectus (e.g. a high level summary relating to eligible projects with some issuers also including ‘four pillar’ disclosures summarising how they intend to comply with all four pillars of the applicable International Capital Market Association (“ICMA”) principles (here)).

ESMA’s statement makes it clear that it expects issuers to align themselves with this approach of including additional sustainability disclosures in prospectuses for securities which have sustainability features and, in fact, likely goes further in terms of setting disclosure expectations than what is included by issuers at present.

In this context, issuers, underwriters and their advisers will be carefully reviewing prospectus documentation to see what changes need to be made to satisfy ESMA’s expectations.

 

 

Expected disclosure in relation to ‘use of proceeds’ bonds
Disclosure	Legal Basis
Risk Factors: Issuers of ‘use of proceeds’ bonds should disclose risks that are material and specific to the security. In particular, risks regarding the allocation and management of proceeds should be disclosed as well as risks concerning the viability and achievement of the sustainable project.	Prospectus Regulation: Article 16(1) PR Delegated Act: Annex 14 item 2.1 “A description of the material risks that are specific to the securities being offered and/or admitted to trading in a limited number of categories, in a section headed ‘Risk Factors’. […]”
Reasons for the offer and use of proceeds: Issuers should also describe the goal and characteristics of the relevant sustainable project and how the sustainable goal is expected to be achieved as well as any permissible terms and conditions for deviations to the minimum use of proceeds and the sustainable project. If the sustainable project is not identified at the time of the prospectus approval, issuers should disclose the criteria which will be used to determine how the proceeds are allocated for sustainable purposes.	Prospectus Regulation: Article 6(1) PR Delegated Act: Annex 14 item 3.2 “Reasons for the offer to the public or for the admission to trading. Where applicable, disclosure of the estimated total expenses of the issue/offer and the estimated net amount of the proceeds. These expenses and proceeds shall be broken into each principal intended use and presented in order of priority of such uses. If the issuer is aware that the anticipated proceeds will not be sufficient to fund all the proposed uses, then state the amount and sources of other funds needed.”
Information concerning the securities to be offered to the public/admitted to trading: If advanced amortisation may occur, issuers should disclose any impact which this may have on the sustainability performance of an investment.	Prospectus Regulation: Article 6(1) PR Delegated Act: Annex 14 item 4.9(b) “Details of the arrangements for the amortisation of the loan, including the repayment procedures. Where advance amortisation is contemplated, on the initiative of the issuer or of the holder, it shall be described, stipulating the amortisation terms and conditions”.
Additional information: If issuers of ‘use of proceeds’ bonds indicate that any advice or assurances have been provided by advisors or third parties about the sustainability characteristics of the security, the prospectus should contain disclosure concerning the scope of those assurances and by whom they were provided.	Prospectus Regulation: Article 6(1) PR Delegated Act: Annex 14 item 7.1 “If advisors connected with an issue are referred to in the securities note, a statement of the capacity in which the advisors have acted.”

 

 

Additional disclosure for ‘use of proceeds’ bonds secured by cash flows not generated by the issuer or ‘asset-backed securities’
Disclosure	Legal Basis
Underlying assets: If issuers of ‘use of proceeds’ bonds use the proceeds to purchase underlying loans or other assets which are considered sustainable, the prospectus should contain disclosure on the criteria used to determine their sustainability. If any of those loans do not meet the criteria that fact should be stated in the prospectus.	Prospectus Regulation: Article 6(1) PR Delegated Act: Annex 19 item 2.2.7 “The method of origination or creation of the assets, and for loans and credit agreements, the principal lending criteria and an indication of any loans which do not meet these criteria and any rights or obligations to make further advances.”
Post-issuance reporting: If issuers of ‘use of proceeds’ bonds intend to provide post-issuance information, which includes sustainability-related information, they should indicate what information will be reported and where it should be obtained.	Prospectus Regulation: Article 6(1) PR Delegated Act: Annex 19 item 4.1 “An indication in the prospectus of where the issuer is under an obligation to, or where the issuer intends to, provide post-issuance transaction information regarding securities to be admitted to trading and the performance of the underlying collateral. The issuer shall indicate what information will be reported, where such information can be obtained, and the frequency with which such information will be reported.”

 

 

Expected disclosure in relation to Sustainability-Linked Bonds
Disclosure	Legal Basis
Risk factors: Issuers of ‘sustainability-linked’ bonds should disclose risks that are material and specific to the security. In particular, risks regarding KPIs and associated sustainability targets should be disclosed in the prospectus. This disclosure should include, but not be limited to, risks concerning potential conflicts of interest when such KPIs are selected and monitored. Furthermore, owing to the nature of ‘sustainability-linked’ bonds, the impact of the issuer’s overall firm-level sustainability performance on the security should be clear in the risk factors.	Prospectus Regulation: Article 16(1) PR Delegated Act: Annex 14 item 2.1 A description of the material risks that are specific to the securities being offered and/or admitted to trading in a limited number of categories, in a section headed ‘Risk Factors’. […]”
Reasons for the offer and impact on the issuer: Issuers not intending to use the offer proceeds for a specified sustainability project but who issue sustainability-linked bonds for general corporate purposes should disclose the rationale for the issuance as well as its impact on the issuer in the prospectus.	Prospectus Regulation: Article 6(1)(c) PR Delegated Act: Annex 14 item 3.2 “Reasons for the offer to the public or for the admission to trading. Where applicable, disclosure of the estimated total expenses of the issue/offer and the estimated net amount of the proceeds. These expenses and proceeds shall be broken into each principal intended use and presented in order of priority of such uses. If the issuer is aware that the anticipated proceeds will not be sufficient to fund all the proposed uses, then state the amount and sources.
Information concerning the securities to be offered to the public/admitted to trading: If interest payments are influenced by the fulfilment or failure to fulfil sustainability objectives this should be disclosed in the prospectus. The means by which interest payments are calculated in such contexts should clearly be disclosed. This information should include references to the selected key performance indicators as well as sustainability performance targets.	Prospectus Regulation: Article 6(1)(b) PR Delegated Act: Annex 14 item 4.8(b) “the provisions relating to interest payable”

 

 

Expected disclosure in relation to Sustainability-Linked Bonds
Disclosure	Legal Basis
Information concerning the securities to be offered to the public/admitted to trading: If advanced amortisation may occur, issuers should disclose any impact which this may have on the sustainability performance of an investment.	Prospectus Regulation: Article 6(1) PR Delegated Act: Annex 14 item 4.9(b) “Details of the arrangements for the amortisation of the loan, including the repayment procedures. Where advance amortisation is contemplated, on the initiative of the issuer or of the holder, it shall be described, stipulating the amortisation terms and conditions”.
Additional information: If issuers of ‘sustainability-linked’ bonds indicate that any advice or assurances have been provided by advisors or third parties about the sustainability characteristics of the selected KPIs, the prospectus should contain disclosure concerning the scope of those assurances and by whom they were provided.	Prospectus Regulation: Article 6(1) PR Delegated Act: Annex 14 item 7.1 “If advisors connected with an issue are referred to in the securities note, a statement of the capacity in which the advisors have acted.”

 

Also contributed to by David O'Keeffe Ioiart