On 23 April 2020, the European Supervisory Authorities (ESAs) published a consultation paper seeking input on their proposed regulatory technical standards (RTS) on environmental, social and governance (ESG) disclosure for financial market participants, advisers and products. The RTS have been developed pursuant to the EU Regulation on sustainability-related disclosures in the financial services sector (SFDR), as amended by the Taxonomy Regulation.

The RTS focus on the content, methodology and presentation of ESG disclosures both at entity-level and product-level, as well as the do not significant harm (DNSH) principle.

The consultation paper also includes preliminary impact assessments of the proposed RTS, which set out the costs and benefits of the proposals according to the ESA’s methodology.

Entity-level ESG disclosures

The principal adverse impacts that investment decisions have on sustainability factors should be disclosed on the website of the entity, and the proposals 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 impacts of investment decisions on sustainability factors, showing how investments adversely impact indicators in relation to: (1) climate and the environment; and (2) social and employee matters, respect for human rights, anti-corruption and anti-bribery matters.

The RTS specify the information that should be disclosed on an entity’s website to describe the environmental or social characteristics of financial products or the sustainable investment; the methodologies used; pre-contractual information; and periodic reports.

The ESAs have included draft indicators for adverse impacts, based on consultations with the Joint Research Centre of the European Commission 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 RTS indicate the rules for how this disclosure should be carried out, ensuring transparency to investors regarding how products meet their sustainability characteristics or objectives. The RTS also set out the additional disclosures that should be provided by products that have designated an index as a reference benchmark.

Information in periodic reports should specify: (a) the extent to which products with environmental and/or social characteristics meet those characteristics; and (b) for products with sustainable investment objectives and products which objective is a reduction in carbon emissions: (i) the overall sustainability-related impact of the product by means of relevant sustainability indicators and (ii) where an index has been designated as a reference benchmark, a comparison between the overall impact of the financial product with the designated index and a broad market index through sustainability indicators.

The product level proposals also set out suggested provisions for disclosing how a product based on sustainable investments complies with the DNSH principle.

Next steps

The ESAs welcome feedback to this consultation by 1 September 2020. Following the close of the consultation the draft RTS will be finalised and submitted to the European Commission.