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Erscheinung:29.03.2021 | Topic Sustainability Providing transparency on sustainable investments – the EU Disclosure Regulation
The EU Regulation on sustainability‐related disclosures in the financial services sector (EU Disclosure Regulation) entered into application on 10 March. Since then, financial entities have been obliged to provide proof of the sustainability of their products and services. But a number of points still need to be clarified. In this article we provide an overview of the regulation.
The EU Disclosures Regulation, which entered into application on 10 March 2021, requires certain entities from the financial services sector to make disclosures on the sustainability of their products. They must inform investors about the environmental and social criteria and standards of corporate governance they observe in their investment decisions. The new regulation sets out the main information and disclosure requirements covering the entire field of sustainability.
At a glance:The Disclosure Regulation and Taxonomy Regulation apply to the following entities
Financial market participants
- Insurance undertakings offering insurance-based investment products (IBIPs)
- Investment services enterprises providing portfolio management
- Institutions for occupational retirement provision (IORPs)
- Manufacturers of pension products
- Asset management companies managing alternative investment funds (AIFs), undertakings for collective investments in transferable securities (UCITS), qualifying venture capital funds or qualifying social entrepreneurship funds
- Offerors of European long-term investment funds (ELTIFs)
- Offerors of pan-European personal pension products (PEPPs)
- Credit institutions providing portfolio management
Financial advisors
- Insurance undertakings and insurance intermediaries providing advice with regard to IBIPs
- Credit institutions
- Investment services enterprises
- Alternative investment fund managers (AIFMs) and UCITS management companies providing investment advice
Key points unclear
However, a number of key points still need to be clarified. The Disclosure Regulation refers in several places to delegated acts which define more explicitly the provisions of the regulation. However, they have yet to be finalised and will only be adopted in stages over the course of 2021.
It is therefore still unclear whether registered alternative investment fund managers (AIFMs) will be subject to the regulation at all. The delegated acts also need to clarify the question of when a financial product actually pursues sustainability objectives or when it merely displays certain environmental or social characteristics. In the case of financial products investing in a broad portfolio of shares and bonds, for instance, it is still unclear from which point these products can be considered sustainable, i.e. whether and, if so, how many other types of investments may be added to these products’ portfolios.
In light of this, in January 2021 the three European Supervisory Authorities (ESAs), supported by BaFin, wrote a letter to the European Commission requesting further clarification.
What needs to be disclosed? And when?
There is also some confusion over the question of when the individual sections of the Disclosure Regulation must be applied. The regulation formally entered into force on 29 December 2020 and, as mentioned above, became applicable from 10 March 2021. From this date onwards, entities must inform their clients of their sustainability risk policies, for example. But when must they report adverse impacts of investment decisions on sustainability factors to their clients? And when must the pre-contractual disclosures required under the regulation be made?
These questions will be answered by the delegated acts once they have been adopted. The ESAs are preparing preliminary drafts of these acts, but they have still to be examined and formally adopted by the Commission and this will presumably take some time. The detailed measures of the regulation will therefore become applicable from 1 January 2022 at the earliest. BaFin trusts that entities will use the rest of the year to prepare their reporting procedures in the best possible way for the entry into force of the delegated acts. The EU Commission recommends entities to use the ESA drafts as a guide.
Entry into application in several stages
The regulation itself also provides for a number of exemptions which have been applicable since 10 March. For example, large-scale financial market participants will only have to report adverse impacts of investment decisions on sustainability factors from 30 June 2021 onwards. But the most important exemption concerns the entities’ obligation to inform investors in periodic reports of the environmental and social characteristics of their financial products, which will become applicable from 1 January 2022. This obligation concerns all periodic disclosures specified in Articles 8 and 9 of the Disclosure Regulation. Up until now, financial market participants had assumed that they had time until 2023 to prepare for this periodic reporting. However, the Disclosure Regulation makes other specifications.
Furthermore, the Disclosure Regulation has been amended by the EU Taxonomy Regulation: from 2022 onwards, additional pre-contractual disclosure and periodic report obligations will apply to certain financial products. The taxonomy regulation requires that all financial products not covered by the Disclosure Regulation are accompanied by a statement to this effect. The disclosure requirements regarding climate change mitigation and climate change adaptation become applicable from 1 January 2022 and those for the other environmental objectives a year later.
A tablelisting the dates from which the reporting obligations become applicable can be found on the BaFin website (only available in German).
Author
Frank Pierschel
Head of BaFin’s Division for International Policy/Regulation - Banking Supervision
and Chief Sustainable Finance Officer of BaFin
In an interview, BaFin’s Chief Sustainable Finance Officer explains the main changes brought about by the Disclosure Regulation, which entered into application on 10 March 2021, and what still needs to be clarified. He also discusses the latest developments in the field of sustainability in the coronavirus year 2020 and talks about his expectations for 2021.
“The coronavirus year 2020 has been a year of realisations“
The European Disclosure Regulation requires financial market participants and financial advisers to provide more transparency in their dealings with sustainability. What do you expect from this?
Pierschel: Generally speaking, BaFin supports the European Union’s efforts to achieve more transparency on questions of sustainability. Investors offered a financial product that is claimed to be sustainable or to a certain extent sustainable must be given information on how the provider intends to fulfil this promise. What objectives does the product pursue? What investments are actually being made? Is the product delivering on its promise of sustainability? A company must be able to provide investors with answers to all these questions.
A disclosure requirement must of course follow certain rules. And it must be clear in its application. And this is where the problem lies. The delegated acts, which define more explicitly the provisions of the regulation, have still not been finalised and are only now being adopted in stages. This means that the provisions set out in the acts will become effective at different times. Nevertheless, the EU Commission recommends companies to use the drafts of the delegated acts as a guide in order to prepare themselves for when the acts enter into force. In our article and particularly the table we have published on our website (table only available in German), we would like to clarify a number of points so that the companies concerned can plan their reporting procedures.
How did the topic of sustainability feature in 2020?
Pierschel: A great deal has happened in the field of regulation. The coronavirus pandemic has not detracted attention from the topic of sustainability. If anything, the crisis is serving as an incentive to initiate the structural changes needed to achieve a more sustainable economy. In 2020, the most important component was added to financial regulation in the form of the European Taxonomy Regulation which provides further detail on the provisions of the Disclosure Regulation. I also welcome the work of the European Supervisory Authorities and the European Central Bank’s guide on climate-related and environmental risks, which was inspired by the BaFin Guidance Notice on Dealing with Sustainability Risks, amongst other things. I recommend anyone interested in an overview of the regulatory proposals to read our article on the BaFin website.
As a financial supervisor, I am also pleased to note the advances made at the supervised companies and the impact our Guidance Notice has had. Good progress has been made in risk management.
The coronavirus year 2020 has been a year of realisations: last year was the second-warmest year on record, but it was not such a bad year in terms of climate protection. Just think of the huge reductions in CO2 emissions! This would have been more or less unthinkable before the coronavirus pandemic. The pandemic is now also making a large number of people realise what conversion to a climate-neutral economy demands of us. At the same time, the pandemic has exposed a number of social imbalances. All in all, the year has made us keenly aware of what’s heading our way in matters of climate change, environmental catastrophes and the social consequences accompanying this.
Let’s turn to the immediate future: what in your opinion lies in store for us in 2021?
Pierschel: In financial regulation I expect further progress to be made in the area of sustainability risks. The EU will complete the various stages of its work programme and will not be discouraged by setbacks. Awareness for sustainability must be echoed in strategies, the administrative organisation and risk management of the supervised companies. Greater account must also be taken of sustainability risks in our Supervisory Review and Evaluation Process. To achieve this, we need to have consistent and practical rules to work with. We will continue to apply our risk-based supervisory approach. The important thing is to recognise the potential of sustainable investments without losing sight of their risk content.
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