Principles-based ESG disclosure rules to apply in 2021, European Commission confirms to regulators

The European Commission (EC) has signaled to regulators that high-level ESG disclosure rules adopted last year will continue to apply to financial firms from March 2021 – as initially planned – despite delays to accompanying standards that will eventually provide more detailed reporting obligations. 

As it stands, the disclosures will be ‘principles-based’, meaning companies will choose the scope of reported information based on factors they consider to be material to investor decision-making. Financial firms will be asked to show how sustainability considerations have been integrated at both corporate and product level, in addition to disclosing the extent to which their investment activities have resulted in harmful effects or “adverse impacts”.

The accompanying regulatory standards, which are only expected to be adopted in 2021 due to Covid19-linked disruption, set out 32 mandatory reporting indicators that cover possible adverse impacts in areas such as water use, human trafficking and biodiversity.

The standards are being developed by the EC’s three financial market regulators, the European Securities and Markets Authority, the European Banking Authority and the European Insurance and Occupational Pensions Authority, collectively known as the ESAs.

The EC’s intervention was made in a recent letter to the heads of the ESAs, which stressed that application of the principles-based disclosure requirements was “not conditional” on the adoption of the regulatory standards. “Therefore, all application dates are being maintained as laid down by the Regulation with effect from 2021,” it said.

It is believed to be the first comment from the Commission in relation to the timetable change. Earlier last month, news outlets reported on a leaked letter from the ESAs which informed industry groups of the delayed adoption of the regulatory standards.

This came after a draft version of the regulatory standards received a chilly reception from stakeholders, who described the requirements as too onerous to implement and said the original March 2021 deadline, which would have given financial firms only three months to revamp their internal reporting processes and source the required data, was unreasonable.

But even with the flexibility afforded by the principles-based approach, the forthcoming disclosure rules cover considerable breadth, including requirements for all fund firms to publicly disclose the manner in which sustainability risks are integrated at corporate level into their investment processes and remuneration policies, as well as individual products. Any firm that considers such risks immaterial will be asked to justify that standpoint.

Firms offering investment products with sustainability objectives or claims face additional requirements to ensure that reference benchmarks are in line with product objectives.

Lastly, all fund firms will be asked to detail any adverse impacts of their investment decisions, both at corporate and product level. This will also be carried out on a comply-or-explain basis.