One element of the Sustainable Finance Initiative of the European Union is the promotion of better disclosure on the integration of ESG factors into investment decisions and advice by financial market participants. To that end, a legislative proposal has been submitted to the European Parliament for an EU regulation on-sustainability-related disclosures in the financial services sector on March 22, 2019. The regulation is expected to enter into force in Q3/Q4 of 2019.
Here are some of the new responsibilities that investors and other financial market participants will face:
Investors will have to publish on their website a policy which describes to what extent and how the organization integrates sustainability risks as well as (potential) negative sustainability impacts into its investment decisions. Where the organization does not integrate/consider sustainability risks and impacts, it has to provide a clear explanation for this. Investors will also have to disclose on their website how their remuneration policies are consistent with their approach towards integrating sustainability risks.
In addition to that, for all financial products with sustainable investment objectives, investors will have to disclose on their website the information that they also communicate in pre-contractual disclosures as well as in periodical reports (see below).
Finally, investors will be required to ensure that the information disclosed on their website is up-to-date. In case of changes made, these will have to be explained clearly on that same website.
For all financial products, investors will have to disclose in pre-contractual information how sustainability risks are integrated into the investment decision making process and how they expect those risks to impact on the return of the product. Again, where the investor does not integrate such risks and/or does not expect an impact on the return of a product, this requires a clear explanation.
For all financial products with sustainable investment objectives, investors will be required to disclose information on the sustainable objectives of a product and how these objectives are attained. Further, organizations will have to inform about the methodologies, indices, and data sources used to assess the impact of a product.
Periodically, investors will have to prepare reports for their financial products with sustainable investment objectives. Here, the investor will need to evaluate (1) to what extent the sustainable investment objectives of the product have been attained, and (2) what the sustainability-related impact of the product is, referring to appropriate sustainability indicators as well as the methodologies, data sources, and indices used.
With regards to their marketing and communications activities, investors will need to ensure that these do not contradict the information disclosed according to the new regulation.
In sum, the regulation will ask investors to enhance transparency regarding their financial products when it comes to sustainability-related information. A systematic and comprehensive approach to ESG management will facilitate the compliance with the new requirements substantially. It is currently foreseen that the regulation will allow for a 15 months implementation period after entry into force.