The ESG Disclosure Regulation – New Duties for Financial Market Participants & Financial Advisers

Abstract

On 27 November 2019 Regulation (EU) 2019/2088 (ESG Disclosures Regulation) on sustainability-related disclosures in the financial services sector came into force and the regulation will apply 15 months later. The regulation forms part of a number of initiatives adopted by the European Commission as part of its Action Plan on sustainable financial adopted in March 2018. Apart from the ESG Disclosures Regulation, these include: • a regulation amending the benchmark regulation in relation to low carbon benchmarks and positive carbon impact benchmarks; • a regulation on the establishment of a framework to facilitate sustainable investment (the Taxonomy Regulation); and • delegated regulations amending MiFID II Delegated Regulation 2017/565 (LVL 2 MiFID II) and Commission Delegated Regulation (EU) 231/2013 (LVL 2 AIFMD) to integrate ESG considerations and preferences into investment advice and portfolio management; and to incorporate sustainability risks. The ESG Disclosures Regulation seeks to harmonize existing provisions on disclosures to investors in relation to sustainability-related disclosures by imposing requirements to a wide range of cross-sectoral financial market participants (e.g. UCITS management companies and investment firms) and financial advisers (e.g. MiFID II investment firms and credit institutions) in relation to financial products (e.g. alternative investment funds (AIF) and undertakings for collective investment undertakings (UCITS)). Due to the cross-sectoral approach of the ESG Disclosures Regulation, the regulation ensures a level playing field. Ultimately, the regulation seeks to contribute in eliminating green-washing, i.e. a form of marketing in which green values are deceptively used to persuade investors that the financial products of a financial market participant or financial adviser are environmentally friendly and therefore better. To that end, the ESG Disclosures Regulation requires the integration of sustainability risk in financial market participants' investment decision-making processes or financial adviser' advisory processes and transparency as regard financial products, which target sustainable investments. Specific requirements include pre-contractual disclosures, disclosures on websites and disclosures in periodic reports in relation to financial products. The Taxonomy Regulation supplements the disclosure rules enshrined in the ESG Disclosures Regulation. These will be subsequently discussed in this contribution on an integrated basis.