Disclosure Regulation1 – What is It and Who is Impacted?

Dechert LLP

[co-author: Phillipa List]

Signed by the European Parliament and the Council of the European Union on 27 November 2019 and published in the Official Journal of the European Union on 9 December 2019, the regulation on sustainability-related disclosures in the financial services sector (the “Disclosure Regulation”) will apply with effect from 10 March 2021.

What?

The Disclosure Regulation intends to provide harmonized disclosure requirements for investment products which:

  • Promote environmental and/or social objectives; and
  • Have “sustainable investment” (defined as investing with an environmental objective) as their objective.

When?

Whilst the Disclosure Regulation will not apply until 10 March 2021, firms in scope should start planning how they will implement the new disclosure requirements now, and should consider whether it is appropriate to address the pre-contractual disclosure requirements in offering documents for all new products going forward.

Who?

The following entities are all in scope of the Disclosure Regulation:

  • AIFMs;
  • UCITS management companies;
  • Investment firms authorized under MiFID II providing portfolio management or investment advice; and
  • Managers of (i) qualifying venture capital funds and (ii) qualifying social entrepreneurship funds.

The Disclosure Regulation also bring firms within scope of certain requirements even when they are not managing or advising on such products.

Why?

Put simply, ESG significance for asset managers is growing. With continued media scrutiny of sustainability and environmental pressures, it has become an increasing priority for investors and, particularly in Europe, a key consideration in asset allocation. Regulating “greenwashing” has been high on the EU’s regulatory agenda and the Disclosure Regulation intends to provide harmonized disclosure requirements for investment products.

What Next?

A summary of the application of the key requirements is set out below, and firms in scope of the Disclosure Regulation will need to take steps to ensure that they comply with these requirements:

Requirement

All

Managing products which promote environmental and / or social characteristics

Managing products which have sustainable investment as its objective

Information on website regarding:

Policies on the integration of sustainability risks in investment decision-making.

Applicable

Applicable

Applicable

How the adverse impacts of investment decisions on sustainability factors are considered, or clear reasons for not considering such impacts2.

Applicable

Applicable

Applicable

How remuneration policies are consistent with the integration of sustainability risks.

Applicable

Applicable

Applicable

The environmental or social characteristics or the sustainable investment objective of a product.

Not Applicable

Applicable

Applicable

Pre-contractual disclosure to cover3:

The manner in which sustainability risks are integrated into investment decisions.

Applicable

Applicable

Applicable

The likely impacts of sustainability risks on returns (or an explanation of why these are not considered relevant).

Applicable

Applicable

Applicable

How the promoted environmental or social characteristics are met (including information on any benchmark index).

Not Applicable

Applicable

Not Applicable

Information on how a sustainable investment objective is to be attained (including information on any benchmark index).

Not Applicable

Not Applicable

Applicable

Periodic reports to include:

Extent to which environmental or social characteristics are met.

Not Applicable

Applicable

Not Applicable

The overall sustainability-related impact of the financial product (including, where relevant, a comparison of impact against the index).

Not Applicable

Not Applicable

Applicable

ESG investment is now high on the regulatory agenda in the European Union and it is likely that attention on this area will continue to increase.

Footnotes

1) Regulation (EU) 2019/2088 of the European Parliament and of the Council of 27 November 2019 on sustainability‐related disclosures in the financial services sector.

2) Large financial market participants (defined as having on average 500 employees during a financial year and including group companies) cannot avail of this opt-out with effect from 30 June 2021.

3) For AIFMs, this shall form part of the Article 23 disclosures. For UCITS management companies, this must be in the prospectus disclosures.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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