Sustainable Finance: the ESAs launch consultation for ESG disclosures standards

Context and objectives

On 22 April 2020, the European Supervisory Authorities (ESAs) published a joint consultation paper setting out the proposed Regulatory Technical Standards (RTS) on content, methodologies and presentation of disclosures, pursuant to Regulation (EU) 2019/2088 on Sustainable Finance Disclosure (SFDR).

The draft RTS relate to several disclosure obligations under the SFDR regarding necessary information on the adverse impacts of investment decisions and financial advice to enable end-investors to make informed investment decisions, in particular

• The details of the presentation and content of the information in relation to the principle of ‘do not significantly harm’, as set out in Article 2 (17) of the SFDR
• a statement on an entity’s website of a statement on the due diligence policy in respect of the adverse impact of investment decisions on sustainability factors in relation to climate and other environment-related impacts (Article 4(6)) and adverse impacts in the field of social and employee matters, respect for human rights, anti-corruption and anti-bribery matters(Article 4(7));
• Pre-contractual information on how a product with environmental or social characteristics meet those characteristics and if an index has been designated as a reference benchmark, whether and how that index is consistent with those characteristics;
• Pre-contractual information to show, where a product has sustainable investment objectives and a) has a designated index as a reference benchmark, how that index is aligned with the sustainable investment objective and an explanation as to why and how that designated index aligned with the objective differs from a broad market index (Article 9(1) SFDR); b) if no index has been designated as a reference benchmark, an explanation on how that objective is to be attained (Article 9(2) SFDR);
• Information on an entity’s website of a statement on the due diligence policy; the environmental or social characteristics of financial products or the sustainable investment; the methodologies used; the pre-contractual information, (Articles 8 and 9) the periodic reports (Article 11);
• Information in periodic reports according to sectoral legislation, specifying (a) the extent to which products with environmental and/or social characteristics meet those characteristics, and (b) for products with sustainable investment objectives and products which objective is a reduction in carbon emissions according to legislation requirements¹.

In order to adapt to the environmental emergency situation, financial market participants and financial advisers will be required to disclose these specific information on their approaches to the integration of sustainability risks and the consideration of adverse sustainability impacts.

Principal adverse impact disclosure

The draft RTS provides a single framework for adverse impact disclosure by financial market participants, which includes:

• A mandatory reporting template contains summary, scope, the principal adverse impacts, policies on the identification of principal adverse impacts, actions taken and planned to mitigate the principal adverse impacts,
• A set of indicators for both climate and environment-related adverse impacts and adverse impacts in the field of social and employee matters, including a core set of mandatory indicators and additional indicators to identify, assess and prioritize additional principal adverse impacts,
• A statement to be published where adverse impacts of investment decisions are not considered,
• Requirements for financial advisers.

Product pre-contractual disclosure 

The product disclosure requirements must be integrated into existing sectoral disclosure formats. At the same time the ESAs are asked to consider that the product disclosures should be “accurate, fair, clear, not misleading, simple and concise”. Therefore, the details of the content and presentation of the information to be disclosed at the pre-contractual level in the sectoral documentation prescribed by SFDR include: Environmental or Social characteristics promoted by the financial product, No sustainable investment objective, Investment strategy, Sustainability indicators, Use of derivatives, Website reference and Reference benchmark².

Product website disclosure

Financial market participants should publish the information for each financial product, in the order and made up of information on:

• Summary,
• Environmental or social characteristics of the financial product,
• Proportion of investments,
• No sustainable investment objective,
• Investment strategy,
• Monitoring of environmental or social characteristics,
• Methodologies,
• Due diligence,
• Engagement policies,
• Data sources and processing,
• Limitations to methodologies and data,
• Designated reference benchmark / Attainment of the sustainable investment objective.³

The draft RTS also set out where and how the financial market participant must publish the information on the website, including the need to publish a two-page summary. There are also requirements for products making sustainable investments regarding how the product complies with the “do not significantly harm” principle from the SFDR in relation to the principal adverse impact indicators.

Product periodic disclosure

The draft RTS for periodic product disclosure set out the details of the content and presentation of information to be disclosed, which should contain evidence around the following elements:

• Attainment of the environmental or social characteristics promoted by the financial product,
• No significant harm of sustainable investment objectives,
• Top investments of the financial product, 
• Sustainable performance of the index designated as a benchmark, 
• Proportion of sustainability-related investments,
• Actions taken to attain environmental or social characteristics.⁴

It is also required to use a mandatory reporting template for the presentation of the periodic disclosure, and to include how the product has successfully complied with the “do not significantly harm” principle from SFDR in relation to the principal adverse impact indicators.

Next steps

The consultation paper is available on the websites of the three ESAs. Comments on this consultation paper should be sent using the response form, via the ESMA website under the heading ‘Your input/Consultations’. Responses should be provided by 1 September 2020.

The ESAs will be reviewing these draft technical standards based on the responses received. They will then be submitted as a final report to the Commission for endorsement before being published in the Official Journal of the European Union.

Accordance with the SFDR, the deadline for ESAs to deliver the draft Regulatory Technical Standards (RTS) on the content, methodologies and presentation of information for sustainability indicators in relation to adverse impacts on the climate and other environment‐related adverse impacts is on the 30^th of December 2020. The ESAs should are also expected to develop the RTS adverse impacts in the field of social and employee matters, respect for human rights, anti‐corruption and anti‐bribery matters by 30 December 2021.

Most of provisions of this Regulation shall apply from 10 March 2021. The disclosure requirements for financial products will apply later, as from 1 January 2022.

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¹ Article 11

² Article 14

³ Article 34.1, and article 35.1

⁴ Article 36

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