European Union Action Plan on Sustainable Finance: Disclosures Regulation
The EU Action Plan on Sustainable Finance (the "Action Plan"), is an ambitious package of measures aimed at directing private sector finance towards the mitigation of climate change and other environmental threats. The Action Plan will impact all UCITS management companies (including self-managed investment companies), AIFMs and MiFID-authorised investment firms, whether or not they label their financial products "green".
Published in May 2018, the Action Plan includes three core legislative proposals as well as proposed amendments to the UCITS, AIFMD and MiFID frameworks, to ensure the integration of sustainability risks and other sustainability factors into existing rules (see table below for an overview of key elements of the Action Plan).
This briefing will focus on the proposed Regulation on disclosures relating to sustainable investments and sustainability risks (the "Disclosures Regulation"), the final text of which is expected to be published in the Official Journal of the European Union (the "Official Journal") over the forthcoming weeks.
Political agreement on the Disclosures Regulation has been reached, with the European Parliament adopting its position on first reading on 18 April 2019. A provisional edition of the text of the legislative resolution adopted has been published and the following is a summary of the obligations this contains.
Scope and Requirements
The Disclosures Regulation, along with other measures, is intended to ensure that "financial market participants", including UCITS management companies, AIFMs and investment firms providing portfolio management:
- Systematically consider and integrate sustainability risks and consider adverse sustainability impacts in their processes; and
- Provide investors with sustainability-related information on the financial products they offer or advise on.
"Financial advisers", including UCITS management companies, AIFMs and investment firms which provide investment advice, also fall within the scope of this legislation.
Requirements applicable to all Financial Market Participants and Financial Advisers
All FMPs, irrespective of whether they hold their financial products out as "green" and all financial advisers must:
- Publish information on their policies on the integration of sustainability risks in their investment decision-making process (FMPs)/their investment or insurance advice (financial advisers) on their websites;
- Include information in their remuneration policies on how their remuneration policies are consistent with the integration of sustainability risks – this information also to be published on their websites; and
- Provide "pre-contractual disclosures" to investors (to be included, in the case of UCITS and AIFs, in their prospectuses) relating to the integration of sustainability risks, addressing:
- i. the manner in which sustainability risks are integrated into the investment decisions of FMPs/the investment or insurance advice provided by financial advisers; and
- ii. the result of the assessment of the likely impacts of sustainability risks on the returns of the relevant financial products; and
where sustainability risks are deemed not to be relevant, these disclosures must include a clear and concise explanation of why this is considered to be the case.
Additionally, FMPs will be required to publish and maintain on their websites either:
- i. in cases where they do consider the adverse impacts of investment decisions on sustainability factors: a statement (including prescribed information) on the due diligence policies applied with respect to these principal adverse impacts, taking account of their size, nature and the scale of their activities and the types of their financial products; or
- ii. where consideration is not given to the adverse impacts of investment decisions on sustainability factors: clear reasons for this (and, where relevant, information as to whether and when they intend to do so).
Likewise, financial advisers will be required to publish and maintain on their websites either information as to whether (taking account of their size, the nature and scale of their activities and the types of financial products they advise on) they consider in their investment advice or insurance advice the principal adverse impacts on sustainability factors or information as to why they do not consider adverse impacts of investment decisions on sustainability factors in that advice, including, where relevant, whether and when they intend to do so.
Requirements applicable to Financial Market Participants in respect of "green" financial products only
Enhanced disclosure requirements apply where either the financial product offered by the FMP (i) is presented as promoting environmental or social characteristics; (ii) has as its objective "sustainable investments" (as defined); or (iii) has as its objective the reduction of carbon emissions. To this end the draft legislation includes prescribed:
- Pre-contractual disclosures;
- Information to be maintained in a prominent, easily accessible area of the website of the relevant FMPs; and
- Information to be published in periodic reports.
The European Supervisory Authorities ("ESAs") (ESMA, the EBA and EIOPA) are required under the Disclosures Regulation to develop regulatory technical standards ("RTS") further specifying the details of the presentation and content of the information on sustainability investment targets to be disclosed in pre-contractual documents, periodical reports and websites of financial market participants. The ESAs are also required to develop implementing technical standards to establish the standard presentation of sustainable investments in marketing communications.
The Regulation will enter into force 20 days after its publication in the Official Journal and will apply 15 months following this publication in the Official Journal. Certain RTS will be required to be published 12 months after the date of the Regulation's entry into force and the remaining RTS are required to be published 24 months after its entry into force.
While the majority of obligations under the proposed Disclosures Regulation will apply 15 months after its publication in the Official Journal, entry into force of the requirements relating to the provision of first annual reports containing information under Article 7 (transparency of sustainable investments in periodical reports) is delayed for a year.
As recently as last month, EFAMA and a number of other trade associations issued a request to the Commission to delay implementation of the Disclosures Regulation. Their primary concern is the risk that, in line with the timings set out above, certain of the RTS will not be published before the application date of the Disclosures Regulation. They warn that this will create significant compliance challenges and liability risk for the financial services industry. The Commission's response of 2 October has made clear, however, that a delay will not be granted and indicates that the Regulation will "be formally adopted and published in the Official Journal in the forthcoming weeks".
Industry has further warned that significant challenges to compliance with the Disclosures Regulation will be presented by the delayed implementation of the proposed "Taxonomy" Regulation. Financial industry associations have stressed the need for a common and reliable taxonomy to be put in place before any enhancements of existing financial market regulations come into effect. However, a table published by the Council of the EU on 15 October 2019, comparing the positions of the EU institutions on the draft Taxonomy, reveals significant divergences of view. Political agreement on the taxonomy is therefore unlikely to be achieved until sometime next year yet the final text of the Disclosures Regulations is expected any day.
Lorena Dunne is a Partner in William Fry's Asset Management & Investment Funds Department