On the 9th of December 2019, EU published Regulation (EU) 2019/2088 of the European Parliament and of the Council on sustainability-related disclosures in the financial services sector (the “Disclosure Regulation”). The Disclosure Regulation shall apply from the 10th of March 2021 with some exceptions.

These obligations mean that companies in the financial sector will be subject to an increasing amount of disclosures related to environmental, social, and governance (ESG) factors. Financial entities will now need to assess sustainability risks and opportunities for their products and advice in order to be prepared for these new disclosure demands.

The purpose of the Disclosure Regulation

The Regulation drives from the goal to direct investments, economic actions, and methods towards more sustainable and resilient solutions and business models and, by this, transform the sector for sustainable growth.

The purpose of the Regulation is to unify disclosures in the financial market sector and prevent the so-called “green washing phenomenon”. The aim is to promote fair untangled competition where the comparison of investment products will get easier for the benefit of all investors.

Which entities do the disclosure obligations concern?

Due to differences in disclosure obligations, entities are divided into “financial market participants” and “financial advisers”.

Entities should comply with the disclosure obligations regarding financial market participants if they offer financial products and should comply with the rules on financial advisers if they provide investment advice or investment insurance advice.

The Disclosure Regulation concerns Financial Market Participants such as:
• Investment firms which provide portfolio management
• Credit institutions which provide portfolio management
• UCITS management companies
• Alternative Investment Fund Managers (AIFM)
• Insurance undertakings which make available insurance-based investment products
• Manufacturers of a pension products
• Managers of qualifying venture capital funds and qualifying social entrepreneurship funds
• Institutions for occupational retirement provision
• Pan-European personal pension product (PEPP) providers

and Financial Advisers such as:
• Investment firms, credit institutions, AIFMs and UCITS companies which provide investment advice
• Insurance intermediaries or undertakings which provide insurance advice concerning insurance‐based investment products.

Exemptions
Since the obligations regarding financial advisers does not apply to insurance intermediaries or investment firms providing investment advice with less than three employees, small companies are excluded from the disclosure obligations.

Companies with more than 500 employees are obligated to publish information regarding adverse impact on sustainability factors on the company website.

Information to be disclosed

There is a large spectrum of different disclosure obligations that comes with the new Regulation. The disclosure obligations can be roughly divided into two categories;

• disclosures that concern every entity in scope of application whether they contribute to any sustainable objectives defined in the regulation or not, and;
• disclosures that obligate only those financial participants that contribute to sustainability characteristics in the investments.

These disclosures also vary on how they should be published, e.g. on the website, in periodic reports, or in connection with pre-contractual information given to the customer or possible customer, such as prospectus or information on the product or service in accordance with MiFID.

Pre-contractual documents
Information required in pre-contractual documents (e.g. prospectus/MiFID information) such as:
• how sustainability risks are integrated into the investment decisions/advice
• the results of the assessment of the likely impacts of sustainability risks on the returns of the financial products
• where sustainability risks are deemed not to be relevant in the investment decision/advise, an explanation must be provided.

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• where the financial market participant considers principal adverse impacts of investment decisions on sustainability factors, a statement on due diligence policies with respect to those impacts,
• where the financial market participant does not consider adverse impacts of investment decisions on sustainability factors, clear reasons for why it does not do so, including, where relevant, information as to whether and when it intends to consider such adverse impacts
• Whether financial advisers as part of their advice consider the principal adverse impacts on sustainability factors or why such impact have not been considered.

Where a financial product promotes among other characteristics, environmental or social characteristics, the information to be disclosed shall include the following:

Pre-contractual documents
• information on how those characteristics are met;
• if an index has been designated as a reference benchmark, information on whether and how this index is consistent with those characteristics

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• a description of the environmental or social characteristics or the sustainable investment objective;
• information on the methodologies used to assess, measure and monitor the environmental or social characteristics or the impact of the sustainable investments selected for the financial product

Periodic reports
Information to be provided when financial market participants make available a financial product:
• promoting sustainable characteristics; the extent to which environmental or social characteristics are met or
• which has sustainable investment as its objective
– the overall sustainability‐related impact of the financial product through relevant sustainability indicators, or
– where an index has been designated as a reference benchmark a comparison between a specific index that has been selected as a reference benchmark and the overall sustainability-related impact and a comparison of a broad market index through sustainability indicators.

The information required and the way it is presented will vary with different entities and situations. For instance, certain requirements shall be complied with where an index has been designated as a reference benchmark.

First amendment proposal includes statements

The first amendment proposal to the Disclosure Regulation was published on 29 of January 2020 in connection with the proposal to the Taxonomy Regulation. Where a financial product invests in an economic activity that contributes to an environmental objective, the pre-contractual documents and periodic reports shall include the following:

• the information on the environmental objective or environmental objectives to which the investment underlying the financial product contributes
• a description of how and to what extent the investments underlying the financial product are invested in environmentally sustainable economic activities

Where a financial product promotes, among other characteristics, environmental or social characteristics, or a combination of those characteristics the pre-contractual documents and periodic reports shall be accompanied by the following statement:
‘The “do no significant harm” principle is applied only for the investments underlying the product that take into account the EU criteria for environmentally sustainable investments.
The investments underlying the remaining portion of this financial product do not take into account the EU criteria for environmentally sustainable investments.’

Where the financial product neither promote any environment or social characteristics, nor has any sustainability or carbon emissions reduction objectives, the pre-contractual documents and periodic reports shall be accompanied by the following statement:
“The investments underlying this financial product do not take into account the EU criteria for environmentally sustainable investments.”

We at Lexia are happy to provide further information on sustainability-related disclosure obligations.

Further information:

Katja Flittner, Associate, [email protected], tel. +358 50 4100512