EU Regulation on sustainability-related disclosures

As part of the European’s Commission’s Action Plan on Financing Sustainable Growth published in March 2018, the Regulation (EU) 2019/2088 of the European Parliament and of the Council of on sustainability-related disclosures in the financial services sector was published on 9 December 2019 in the Official Journal of the European Union (the Disclosure Regulation).

The purpose of the Disclosure Regulation is to achieve more transparency on how financial market participants and advisers consider sustainability risks in their investment decisions and insurance or investment advice. A sustainability risk is defined as an environmental, social or governance event or condition that, if it occurs, could have a negative material impact on the value of an investment.

The Disclosure Regulation lays down harmonised rules applicable as from March 2021 to financial market participants and advisers with regard to:

• the integration and consideration of sustainability risks and adverse
  sustainability impacts in their decision making or investment advice
  processes; and
• the provision of sustainabiliy related information with regard to
  financial products.

The disclosure obligations under the Disclosure Regulation apply to all financial market participants, including notably AIFMs, UCITs management companies, investment firms, insurance and credit institutions providing porfolio management, as well as to financial advisers providing investment and/or insurance advice.

The Disclosure Regulation requires, amongst others, that the entities concerned disclose:

(A) In their pre-contractual documents:

• the manner in which sustainability risks are integrated into their
  investment decision or insurance advice;
• the potential impacts of sustainable risks on the returns of
  financial products; and
• information on how the financial products consider principal adverse
  impacts on sustainability factors.

(B) on their website:

• information on their remuneration policies on how they integrate
  sustainability risks; and
• information on their strategies to consider adverse impacts of
  investment decisions on sustainability.

Various precontractual documents, such as, amongst others, prospectuses, marketing documents, annual reports will need to be amended to comply with the Disclosure Regulation.

Financial market participants and advisers will be subject to additional disclosure obligations where the financial product promotes environmental and social characteristics, or has sustainable investment as its objectives.

The Regulation (EU) 2019/2089 of the European Parliament and of the Council of 27 November 2019 amending Regulation (EU) 2016/1011 as regards EU Climate Transition Benchmarks, EU Paris-aligned Benchmarks and sustainability-related disclosures for benchmarks has also been published on 9 December 2019 in the Official Journal of the European Union (the Low Carbon Benchmark Regulation, together with the Disclosure Regulation, the Regulations). These Regulations that have been adopted as part of the Action Plan are expected to be followed by other European Union Regulations and/or Directives related to environmental, social and corporate governance (ESG) principles and that will amend in particular the UCITS, AIFMD, MiFID, IDD, and Solvency Directives.