Updated rules governing prospectus disclosures will require European service providers to disclose how environmental, social and governance factors could affect the investment performance of their products, or explain to regulators why they haven’t done so.
The new reporting expectations come as part of the adoption of guidelines which set out the technical criteria for prospectus disclosures by market regulator the European Securities and Markets Authority (ESMA). Instead of ‘comply-or-explain’-based disclosures on broader ESG issues, ESMA’s previous guidelines asked issuers to consider relevant disclosures of “environmental and employee matters” on a voluntary basis.
In its response to a recent consultation on the new guidelines, ESMA noted that it had amended an earlier draft to prevent fund providers exempting themselves from disclosure by saying that “ESG factors are always irrelevant to them”. ESMA said that the guidelines aimed to “encourage issuers to consider ESG disclosures” without making it compulsory, and “should help to remove the impression that ESG factors are only related to non-financial matters”.
Fund providers have two months to comply with new guidelines once they are published on the ESMA website.
The guidelines aim to ensure that “market participants have a uniform understanding of the relevant disclosure” as required by the new EU Prospectus Regulation, which entered into force in July 2019, replacing the EU Prospectus Directive.
While the guidelines are meant to be applied to all European investment funds, products marketed as sustainability-focused are due to face stricter disclosure requirements under the newly-adopted regulation on sustainability-related disclosures in the financial services sector (SFDR), the EU green taxonomy and EU Benchmark Regulation, all of which have been rolled out under the first phase of the EU’s ongoing Action Plan on Sustainable Finance.