On 9 December 2019, Regulation 2019/2088 of the European Parliament and of the Council of 27 November 2019, on sustainability-related disclosures in the financial services sector, was published in the official journal of the European Union. Regulation 2019/2088 (2019/2088) provides further evidence of the commitment of the EU to the ‘Paris Agreement’ which entered into force on 4 November 2016.
At its core the ‘Paris Agreement’ seeks to address climate change issues by, inter alia, encouraging the flow of finance along a pathway which encourages low carbon emission, more resource-efficient and, more sustainable economic development. To this end, the disclosure of information to existing and potential investors on the integration of sustainability risks, on the consideration of possible adverse sustainability impacts, on sustainable investment objectives or, on the promotion of environmental or social characteristics, in investment decision-making and in investment advisory processes, is desirable. However, to date, where such disclosures have been made, they have not been subject to harmonization requirements. Consequently, they have had the potential to distort the market and, in particular, to make it difficult for the investor to compare investments, and investment products, across national boundaries. 2019/2088 has been introduced with the intention of harmonising such disclosures and thereby creating a ‘level playing field’.
Under 2019/2088 all financial market participants and financial advisors will be required to disclose specific information on their approaches to the integration of a ‘sustainability risk’ into their investment decisions. They will also have to disclose the extent to which their decision-making process and their investment products take into account the consideration of ‘sustainability factor’ adverse impacts. A ‘sustainability risk’ is defined as an ‘environmental, social or governance event or condition that, if it occurs, could cause an actual or potential material negative impact on the value of the investment.’ ‘Sustainability factors’ are defined as environmental, employee and social matters, respect for human rights, anti-corruption and anti-bribery matters. Managers of so-called ‘Environmental, Social and Governance’ focused funds (‘ESG funds’) must meet additional requirements. ESG funds are those which promote social or environmental characteristics, have a sustainable investment goal or, aim to reduce carbon emissions.
Financial advisers employing fewer than three persons are exempt from providing the specific disclosures detailed in 2019/2088. They remain, however, obliged to consider, and factor in, sustainability risks to their advisory processes.
The full text of 2019/2088 may be found here. A summary of the main disclosure requirements and relevant implementation dates follows:
1. From 10 March 2021 asset managers must include on their websites;
• How sustainability risks are included in their due diligence and investment decision making process,
• An explanation as to whether and how they consider the adverse sustainability impact of their investment decisions. If sustainability factors are not considered they must provide a clear justification as to why this is,
• Managers of ESG funds will have to include information on the ESG aims of the fund,
• Managers of ESG funds will need to publish the methodology they use to assess the ESG impact of any investments they select.
2. Also, from 10 March 2021 asset managers must make the following disclosures in any investment fund prospectus, or pre-contractual investment information, distributed to potential investors:
• How the fund factors sustainability risk into the investment decision making process, and
• The potential impact of such an assessment on the investment return.
If sustainability risks are not included in the investment decision making process there must be a clear explanation as to why they are deemed to be irrelevant
• ESG Fund Managers must provide information on how their ESG fund objective is to be met. They must also include details of any benchmark that is used to measure success and, an explanation as to why that specific benchmark is deemed to be the most suitable.
3. From 1 January 2022, Managers of ESG funds must include information in their Annual Report relating to the extent to which their stated ESG objectives are being met.
4. From 30 December 2022 prospectuses and pre-contractual investment information sheets must explain if, and how, the fund considers the adverse sustainability impact of investment decisions. If they are not considered, a justification for their exclusion must be given.
For more information please speak with any member of our Financial Services team or your usual contact at Elias Neocleous & Co LLC.