A European consultation on ESG disclosure standards is not yet applicable to structured products.
The three European Supervisory Authorities (ESAs) (Eba, Eiopa and Esma) have issued a consultation paper seeking input on proposed environmental, social and governance (ESG) disclosure standards for financial market participants, advisers and products.
The standards, which have been developed under the EU regulation on sustainability-related disclosures in the financial services sector (SFDR), 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 Disclosure Regulation relates to the disclosure of ESG policies at the point of sale, which are not applicable to structured products
The SFDR empowers the ESAs to develop regulatory technical standards (RTS) on the content, methodology, and presentation of ESG disclosures both at entity level and at product level.
At entity level, 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 climate and the environment; and social and employee matters, respect for human rights, anti-corruption and anti-bribery matters.
Product level ESG disclosures 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.
They also set out the additional disclosures that should be provided by products that have designated an index as a reference benchmark, how that index is aligned with the sustainable investment objective and an explanation as to why and how that designated index aligned with the objective differs from a broad market index.
If an index has been designated as a reference benchmark, periodic reports should include a comparison between the overall impact of the financial product with the designated index and a broad market index through sustainability indicators.
Greenwashing
The ESAs noted that under SFDR, products with a sustainable investment objective that rely on an index to attain the sustainable investment objective are passive products and they must demonstrate that the designated index is aligned with the product’s sustainable investment objective.
To ensure a level playing field with products with a sustainable investment objective that pursue an active investment strategy, the ESAs decided that the same level of investor information should be provided to investors.
As a result, products with a sustainable investment objective relying on a passive investment strategy should disclose index-level information for the relevant disclosure requirements.
While the SFDR aims to reduce information asymmetries and providing end-investors with ‘accurate, fair, clear, not misleading’ product-specific information, the ESAs state they are aware of the risks of ‘greenwashing’.
According to a source close to the European Structured Investment Products Association (Eusipa), the trade body is not expected to provide feedback to this consultation.
“The Disclosure Regulation relates to the disclosure of ESG policies at the point of sale, which are not applicable to structured products and the items to be disclosed are not meant to be in the Priips Kid, so there is no link between the two – yet,” the source said.
The consultation paper is available on the websites of the three ESAs and market participants have until 1 September 2020 to send their comments. All contributions received will be published following the close of the consultation, unless otherwise stated.
Click the link to read the consultation paper.