ESAs Propose Regulatory Standards on ESG Disclosures
ESAs launched a consultation on the environmental, social, and governance (ESG) disclosure standards for financial market participants, advisers, and products. These draft regulatory technical standards on content, methodology, and presentation of ESG disclosures have been developed under the Sustainable Finance Disclosure Regulation or SFDR. The consultation contains proposals on the "do not significantly harm" principle, under a recently agreed regulation on the establishment of a framework to facilitate sustainable investment (the Taxonomy Regulation). ESAs invite feedback to the consultation by September 01, 2020. After the consultation closes, the draft technical standards will be finalized and submitted to EC.
These standards aim to strengthen protection for end-investors; improve the disclosures to investors from a broad range of financial market participants and financial advisers; and improve the disclosures to investors regarding financial products. The SFDR empowers the ESAs to develop technical standards on the content, methodology, and presentation of ESG disclosures both at entity and product levels.
Entity-Level Principal Adverse Impact Disclosures
The principal adverse impact that investment decisions have on sustainability factors should be disclosed on the website of the entity; the proposals included in the draft technical standards set out rules for how this public disclosure should be done. The disclosure should take the form of a statement on due diligence policies with respect to the adverse impact of investment decisions on sustainability factors, showing how investments adversely impact indicators in relation to:
- Climate and the environment
- Social and employee matters, respect for human rights, and anti-corruption and anti-bribery matters
ESAs have included draft indicators for adverse impact, based on consultations with the Joint Research Center of EC and the European Environment Agency.
Product-Level ESG Disclosures
The sustainability characteristics or objectives of financial products should be disclosed in their pre-contractual and periodic documentation and on their website. The proposals included in the draft technical standards indicate the rules for how this disclosure should be carried out, ensuring transparency to investors regarding how products meet their sustainability characteristics or objectives. They also set out the additional disclosures that should be provided by products that have designated an index as a reference benchmark. Finally, the product-level proposals set out suggested provisions for disclosing how a product based on sustainable investments complies with the "do not significantly harm" principle.
Comment Due Date: September 01, 2020
Keywords: Europe, EU, Banking, Insurance, Securities, Disclosures, ESG, Sustainability-Related Disclosures, Climate Change Risk, Sustainability-Related Disclosures, Regulatory Technical Standards, Sustainable Finance, ESAs
Michael Denton, PhD, PE
Dr. Denton provides industry leadership in the quantification of sustainability issues, climate risk, trade credit and emerging lending risks. His deep foundations in market and credit risk provide critical perspectives on how climate/sustainability risks can be measured, communicated and used to drive commercial opportunities, policy, strategy, and compliance. He supports corporate clients and financial institutions in leveraging Moody’s tools and capabilities to improve decision-making and compliance capabilities, with particular focus on the energy, agriculture and physical commodities industries.
Credit analytics expert helping clients understand, develop, and implement credit models for origination, monitoring, and regulatory reporting.
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