Environmental, social and governance (ESG) criteria and factors are becoming increasingly important and relevant for investment firms, including fund managers, portfolio managers and financial advisers, as regulators roll out mandatory ESG disclosure standards. Such firms should be developing their ESG policies and procedures and factoring ESG criteria into their decision-making processes and procedures. The reach of certain mandatory standards (referred to below) are much wider in practice than expected and growing calls for ESG-related information from clients, investors, stakeholders and other parties have prompted industry bodies to publish voluntary codes and standards to facilitate investments in green investments and assist firms in understanding the impact of ESG criteria and factors on their businesses.
This alert provides a high level update on the state of play in relation to ESG disclosure requirements as they apply in the European Union and the United Kingdom.
It also highlights emerging industry standards on ESG disclosure in response to the growing appetite among investors and clients for green services and investments, with a focus on the financial services sector.
The Sustainable Finance Disclosure Regulation (SFDR)1
The SFDR requires financial market participants (FMPs) and financial advisers (FAs) to provide clients and investors with certain ESG-related information in relation to the provision of their services and the marketing of certain financial products, using the mandatory disclosure templates (where applicable). For more detailed information regarding the core disclosure requirements under the SFDR, please see our June 2020 alert.
The SFDR will require FMPs and FAs to make significant changes to their pre-contractual client documentation (e.g., prospectuses), contractual documentation, terms of business, periodic reports (e.g., investor reports), website disclosures and internal policies and procedures to ensure that the relevant ESG data and information is captured and properly disclosed. Firms must be compliant with the majority of the SFDR from 10 March 2021, with periodic reporting requirements applying from 1 January 2022.
The SFDR will be supplemented by Level 2 technical standards (the Technical Standards), which will provide additional detail regarding the content and presentation of the required disclosed information, including the mandatory disclosure templates for pre-contractual and periodic product disclosures. The Technical Standards were due to be published on 31 December 2020, and consequently take effect from 10 March 2021. However, the final drafts were not published by the European Supervisory Authorities until 4 February 2021. In accordance with the European Commission’s (EC) recent letter, whilst compliance with the Technical Standards has been delayed, FMPs and FAs are still expected to comply with the substantive provisions in the SFDR from 10 March 2021, for example, the requirement to ensure a sustainability risk-related policy is in place, and to publish information on the integration of sustainability risks in the investment decision-making process on firms’ websites and in their pre-contractual documents. The EC confirmed many firms which currently comply with non-financial reporting requirements under the EU Accounting Directive 2013/34/EU, or which adhere to international standards, should consider using that information to aid their compliance with the SFDR, in the absence of the finalised Technical Standards. The Technical Standards should be endorsed by the EC within three months of their publication (i.e., by 4 May 2021), and FMPs and FAs will be expected to comply with the Technical Standards from 1 January 2022.