Sustainable Finance Disclosure Regulation: The challenging application date of 10 March 2021

In the area of ESG and sustainable finance, investment fund managers need to start preparing for the application of the ESG Disclosure Regulation¹ (“Disclosure Regulation”).

As from 10 March 2021, they will be required to publish ESG-related information on their website. They will also need to ensure that ESG information is provided (i) in the UCITS prospectus (for UCITS) and pursuant to the investor disclosure requirements of Article 23(1) of AIFMD (for AIFs) and (ii) in the fund’s annual report.

1. 1. The Disclosure Regulation in brief

The Disclosure Regulation introduces new transparency requirements on sustainability for financial market participants (“FMP”) and financial advisers².

By increasing and harmonising transparency on sustainability, the aim of this Regulation is (i) to increase investor confidence and reorient capital flows towards sustainable investments, (ii) to better inform investors on sustainability aspects of their investments, (iii) to ensure comparability of ESG-related information, and (iv) to avoid greenwashing.

The definition of FMPs as used in the Disclosure Regulation include UCITS management companies, AIFMs and portfolio managers (“IFMs”), even if they do not have a sustainable investment objective or pursue an ESG investment strategy.

The obligations which apply to all IFMs include information on:

• the integration of sustainability risks into investment decisions;
• the consistency of the remuneration policy with the integration of sustainability risks;
• the consideration of adverse sustainability impacts of investment decisions.

Additional obligations apply in the case where a financial product (which includes UCITS and AIFs) (i) promotes, among other characteristics, social and/or environmental characteristics, or (ii) has a sustainable investment objective.

Depending on the type of information, the relevant disclosures must be made at entity level (i.e. the website of the IFM) and/or product level (i.e. pre-contractual information of UCITS or AIF and annual report).

2. 2. Issues and possible delay

Many requirements provided for in the Disclosure Regulation appear difficult to implement without further clarification, for instance:

• the disclosure in relation to sustainability risk;
• the criteria to apply in order to determine if an investment fund promotes social and environmental characteristics;
• the interaction with the requirements provided for in the Taxonomy Regulation³ and their application dates (which differ from the application date of the Disclosure Regulation).

The European Commission (“EU Commission”) is aware of those issues and will hopefully provide additional guidance in relation to the application of the Disclosure Regulation in the coming weeks.

The lack of readily available and accurate ESG data on the investee companies is another key concern for the industry, which may restrict the ability of many IFMs to comply with the new disclosure requirements. The European Commission’s Green Deal has highlighted the importance of companies and financial institutions improving their disclosure of non-financial information. Different initiatives have been undertaken by the EU Commission in this respect, including the proposed revision of the Non-Financial Reporting Directive 2014/95/EU.

Another important issue is the timing of the adoption of level 2 Disclosure Regulation implementing measures (“Implementing Measures”). The Implementing Measures are intended to detail (i) the requirements regarding principal adverse impacts and (ii) the format and content of information to be included in the prospectus and in the annual report pursuant to Articles 8, 9 and 11 of the Disclosure Regulation.

The date by which a final text of the Implementing Measures will be available is still uncertain⁴. The European Supervisory Authorities (“ESAs”) are working on final draft Implementing Measures and once available, the final draft will need to be adopted by the EU Commission and its co-legislators. The entire adoption process is not expected to be finalised before Q1 2021.

The EU Commission has indicated that the application date of the Implementing Measures could be postponed, possibly until 1 January 2022. However, it seems relatively clear, given the political pressure, that the application date of the Disclosure Regulation itself will not be postponed.

FMPs will therefore need to comply with the new transparency requirements provided for in the level 1 Disclosure Regulation by 10 March 2021.

3. 3. How to proceed in view of the 10 March 2021 deadline?

The following implementation steps can already be initiated by IFMs in anticipation of 10 March 2021.

Those steps include, without limitation:

• the assessment of policies that will need to be adapted or newly drafted for the website publication requirements;
• liaising with investment managers to whom IFMs have delegated portfolio management in order to obtain information on the investment manager’s approach as regards the new ESG disclosure requirements;
• the adoption of a position on the consideration of principal adverse impacts;
• the identification of sustainability risks and how they are integrated into investment decisions and the likely impact on fund returns;
• the qualification of the IFM’s investment funds under management (i.e. Article 8 of the Disclosure Regulation (promotion of social and/or environmental characteristics) or Article 9 of the Disclosure Regulation (sustainable investment objective).

The EU Commission has indicated that compliance with the Disclosure Regulation level 1 text should be “high level and principle-based”. Accordingly, and considering the absence of final Implementing Measures, IFMs should seek to comply with the level 1 Disclosure Regulation on a ‘best effort’ basis. In Luxembourg.

In its annual report for the year 2019, the CSSF strongly supported the transition to sustainable finance, both at national and international level. It recalled that an economy based on ESG criteria will be more resilient and that a sustainable economy goes hand-in-hand with sustainable finance. It also noted that with almost EUR 5,000 billion of assets under management in Luxembourg, the country can play a key role if most of the players shift their priority from avoiding or limiting risks associated with unsustainable investments to integrating sustainable investments in their business strategy and considering them as an opportunity.

Regarding the implementation of the Disclosure Regulation, the CSSF has informally confirmed that it will put into place a fast track procedure coupled with a self-certification procedure for prospectus changes limited to the Disclosure Regulation. The CSSF is expected to communicate on prospectus approvals and other outstanding points as soon as possible.