Sustainability-related disclosures in the financial services sector

SUMMARY OF:

Regulation (EU) 2019/2088 on sustainability-related disclosures in the financial services sector

WHAT IS THE AIM OF THIS REGULATION?

Adopted as part of the legislative framework for sustainable finance, the disclosures regulation lays down harmonised transparency rules for financial market participants* and financial advisers* on how they integrate environmental, social and good governance factors into their investment decisions and financial advice and on their overall and product-related sustainability ambition. It is designed to limit possible greenwashing where financial products* marketed as sustainable or climate-friendly, or claims about financial business’ involvement, do not in practice satisfy those standards.
While the regulation sets out rules on disclosures, it effectively requires financial market participants and financial advisers to make strategic business and investment decisions, which they must then disclose.
The regulation brings further accountability, discipline and efficiency to financial markets and accelerates the competition on the fast-developing segment of sustainable finance. It also improves sustainability performance-related information and comparability to end investors, and data and information to policymakers, supervisors, academia and civil-society organisations.
With comparable and reliable sustainability-related information on risks and impacts of investments, the regulation complements other initiatives fostering the financial system’s transition towards sustainability and continues to support businesses that are already sustainable.

KEY POINTS

The regulation makes a clear distinction between outside-in sustainability risks (environmental, social or governance (ESG) events or conditions that, if they occur, could cause an actual or a potential material negative impact on the value of an investment) and adverse impacts on sustainability factors (negative externalities on ESG conditions). The regulation also clarifies the potential positive sustainability impacts of investing.

Entity level transparency / transparency by financial market participants and financial advisers

Financial market participants and financial advisers must publish on their websites:

information on how they consider the negative externalities of their business models, namely the principal adverse impacts of investment decisions or financial advice on ESG sustainability; or
information explaining why they consider there to be no such negative impact.

The websites of financial market participants and financial advisers must also include information on how:

they integrate sustainability risks into their investment decision-making process and financial advice;
their remuneration policies are consistent with integrating sustainability risks.

Financial product transparency

Sustainable financial products with various degrees of ambition have been developed to date. This is why this regulation distinguishes between the transparency requirements:

for financial products that promote environmental or social characteristics; and
for financial products that aim to have a positive impact on the environment and on society.

The two categories of financial products must explain how their ESG sustainability is to be achieved in pre-contractual financial product-related documents* and has been achieved in periodic financial product-related documents*.

In addition, all financial products must:

specify in pre-contractual documents how sustainability risks are integrated into investment decisions; and
identify the possible impact on an investment’s profitability.

Similar rules apply to financial advisers. Financial market participants that consider principal adverse impacts on sustainability matters must also explain whether, and, if so, how their financial products consider principal adverse impacts.

European supervisory authorities:

draft the necessary regulatory technical standards on the content, methodology and presentation of the relevant information and submit these to the European Commission, by 30 December 2020, 30 December 2021, 1 June 2021 and 1 June 2022;
draft the implementing technical standards to determine the standard presentation of information on the promotion of environmental or social characteristics and sustainable investments;
report to the Commission by 10 September 2022, and annually thereafter, on best practices and make recommendations on voluntary reporting standards.

The report is made public and forwarded to the European Parliament and the Council of the European Union.

European Union (EU) Member States:

ensure the relevant authorities monitor compliance with the legislation;
may apply the regulation to manufacturers of pension products operating national social security schemes, and microinsurance intermediaries and investment firms.

The Commission:

can adopt regulatory and implementing technical standards;
had to evaluate the legislation by 30 December 2022 and consider whether to propose any amendments.

The regulation does not automatically apply to:

insurance intermediaries that provide advice on insurance-based investment products* (IBIPs);
investment firms that provide investment advice and are enterprises irrespective of their legal form.

Delegated acts

Delegated Regulation (EU) 2022/1288 supplements Regulation (EU) 2019/2088 with regard to regulatory technical standards, specifying the content, methodologies and presentation of the information in pre-contractual documents, on websites and in periodic reports relating to:

sustainability indicators and adverse sustainability impacts;
the principle of ‘do no significant harm’;
the promotion of environmental or social characteristics and sustainable investment objectives.

On 31 October 2022, the Commission adopted amendments to this delegated regulation (Delegated Regulation (EU) 2023/363) to require financial market participants to disclose the extent to which their portfolios are exposed to gas- and nuclear-related activities that comply with the taxonomy regulation (see summary), as set out in the Complementary Climate Delegated Act.

These amendments are aimed to increase transparency and allow investors to make informed investment decisions.

The requirements and standards have applied since 1 January 2023 and the amendments have applied since 20 February 2023.

FROM WHEN DOES THE REGULATION APPLY?

It has applied since 10 March 2021, except for the rules on the transparency of adverse sustainability impacts, as far as they apply to financial market participants exceeding an average of 500 employees during the financial year or that are parent undertakings of a large group exceeding, on a consolidated basis, 500 employees during the financial year. In these cases, it has applied since 30 June 2021.

BACKGROUND

Harmonised rules enable end investors to be informed on the ESG impact of different financial products in different Member States.
Institutional investors, such as asset managers, pension funds or life insurance companies, invest on their clients’ behalf. Strict EU legal requirements covering a wide range of financial products, ranging from investment funds to personal pension products, ensure these investors act in their clients’ best interests.
The regulation introduces additional disclosure requirements on the environmental and social impact of investment decisions.
It is designed to limit possible greenwashing where products or services marketed as sustainable or climate-friendly do not in practice satisfy those standards.

For further information, see:

Sustainable finance (European Commission)
Sustainability-related disclosure in the financial services sector (European Commission).

KEY TERMS

Financial market participant. All financial entities managing their clients’ money through financial products and that are:

an insurance undertaking that provides an IBIP;
an investment firm that provides portfolio management;
an institution for occupational retirement provision;
a manufacturer of a pension product;
an alternative investment fund manager;
a pan-European personal pension product provider;
a manager of a qualifying venture capital fund registered in accordance with Article 14 of Regulation (EU) No 345/2013;
a manager of a qualifying social entrepreneurship fund registered in accordance with Article 15 of Regulation (EU) No 346/2013;
a management company of an undertaking for collective investment in transferable securities (UCITS); or
a credit institution that provides portfolio management.

Financial adviser. This term covers all of the following, namely:

an insurance intermediary that provides insurance advice with regard to IBIPs;
an insurance undertaking that provides insurance advice with regard to IBIPs;
a credit institution that provides investment advice;
an investment firm that provides investment advice;
an alternative investment fund manager that provides investment advice in accordance with Directive 2011/61/EU (on hedge and private equity funds); or
a UCITS management company that provides investment advice in accordance with Directive 2009/65/EC on UCITS.

Financial products. Investments, such as:

a portfolio,
an alternative investment fund,
an IBIP,
a pension product or scheme,
a UCITS, or
a pan-European personal pension product.

Pre-contractual financial product-related documents. Documents that share information about financial products prior to an investor taking a decision to invest.

Periodic financial product-related documents. Reports, generally issued on an annual basis, concerning the performance of specific financial products.

Insurance-based investment products (IBIPs). A range of investment products marketed to retail investors which are subject to an investment risk. They include structured financial products, such as options, which are packaged in insurance policies.

MAIN DOCUMENT

Regulation (EU) 2019/2088 of the European Parliament and of the Council of 27 November 2019 on sustainability-related disclosures in the financial services sector (OJ L 317, 9.12.2019, pp. 1–16).

Successive amendments to Regulation (EU) 2019/2088 have been incorporated into the original text. This consolidated version is of documentary value only.

RELATED DOCUMENTS

Commission Delegated Regulation (EU) 2022/1288 of 6 April 2022 supplementing Regulation (EU) 2019/2088 of the European Parliament and of the Council with regard to regulatory technical standards specifying the details of the content and presentation of the information in relation to the principle of ‘do no significant harm’, specifying the content, methodologies and presentation of information in relation to sustainability indicators and adverse sustainability impacts, and the content and presentation of the information in relation to the promotion of environmental or social characteristics and sustainable investment objectives in pre-contractual documents, on websites and in periodic reports (OJ L 196, 25.7.2022, pp. 1–72). Text republished in corrigendum (OJ L 332, 27.12.2022, pp. 1–74).

See consolidated version.

Regulation (EU) 2019/1238 of the European Parliament and of the Council of 20 June 2019 on a Pan-European Personal Pension Product (PEPP) (OJ L 198, 25.7.2019, pp. 1–63).

Directive (EU) 2016/2341 of the European Parliament and of the Council of 14 December 2016 on the activities and supervision of institutions for occupational retirement provision (IORPs) (recast) (OJ L 354, 23.12.2016, pp. 37–85).

Directive (EU) 2016/97 of the European Parliament and of the Council of 20 January 2016 on insurance distribution (recast) (OJ L 26, 2.2.2016, pp. 19–59).

See consolidated version.

Regulation (EU) 2015/760 of the European Parliament and of the Council of 29 April 2015 on European long-term investment funds (OJ L 123, 19.5.2015, pp. 98–121).

Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU (recast) (OJ L 173, 12.6.2014, pp. 349–496).

See consolidated version.

Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC (OJ L 176, 27.6.2013, pp. 338–436).

See consolidated version.

Regulation (EU) No 345/2013 of the European Parliament and of the Council of 17 April 2013 on European venture capital funds (OJ L 115, 25.4.2013, pp. 1–17).

See consolidated version.

Regulation (EU) No 346/2013 of the European Parliament and of the Council of 17 April 2013 on European social entrepreneurship funds (OJ L 115, 25.4.2013, pp. 18–38).

See consolidated version.

Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 on Alternative Investment Fund Managers and amending Directives 2003/41/EC and 2009/65/EC and Regulations (EC) No 1060/2009 and (EU) No 1095/2010 (OJ L 174, 1.7.2011, pp. 1–73).

See consolidated version.

Directive 2009/138/EC of the European Parliament and of the Council of 25 November 2009 on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II) (recast) (OJ L 335, 17.12.2009, pp. 1–155).

See consolidated version.

Directive 2009/65/EC of the European Parliament and of the Council of 13 July 2009 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS) (recast) (OJ L 302, 17.11.2009, pp. 32–96).

See consolidated version.

last update 06.03.2023