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Introduction of disclosure obligations on the integration of ESG factors and risks

Introduction of disclosure obligations on the integration of ESG factors and risks
  • United Kingdom
  • Financial services and markets regulation - ESG
  • Investment funds and asset management


The European Commission published new Regulations on harmonised requirements in respect of sustainability-related disclosures and benchmarks contributing to sustainable finance (EU/2019/2089) (the “Disclosure Regulation”) in the Official Journal on 9 December 2019.

In this briefing we consider the impact of the Disclosure Regulation on Financial Market Participants (read: product providers) such as UCITS management companies, AIFMs, MiFID portfolio managers, pensions and insurance providers. However, it should be noted that the Regulation also applies to the firms advising on these products. This is only one of a number of  environmental, social and governance ("ESG") regulatory initiatives coming from the European Union including the EU Taxonomy, Low Carbon Benchmarks Regulation and changes to MiFID II. Domestically, the FCA recently published its Feedback Statement on climate change and green finance (FS19/6) and rulebook changes are expected in the New Year.

Please see the end of this briefing for a glossary of underlined terms.


With the implementation of these new regulations, it will no longer be possible for product providers to only consider ESG factors if they have an ESG-related/marketed product. Global pressure to prevent climate change and various targets set, such as the 2015 Paris Agreement on climate change and various targets set at European and UK level, means that asset managers will have a part to play and the wider consideration of ESG and sustainability initiatives factors needs to become part of “business as usual” when operating an asset management business and advising investors.

Brexit aside, as an EU member state, the UK financial services sector is subject to a wealth of measures aimed at channelling money into products which can assist in achieving these targets, with recognition that the amount of capital in this sector could be influential. However, a barrier to encouraging investment in this area, and educating investors, is the lack of a consistent set of criteria defining “sustainability” across the EU, and an understanding of the risks of sustainable investments and, until now, no regulatory requirements to consider these issues.

The Disclosure Regulation recognises that current disclosures to investors are “insufficiently developed” as a result of a lack of consistent rules applying to Member States. It aims to harmonise these disclosures to prevent differing approaches being taken at Member State level which could lead to a possible failure to meet the EU targets.

Who is caught?

The Disclosure Regulation applies to ‘financial market participants’ (“FMPs”). These include AIFMs and UCITS management companies, as well as entities such as pension product manufacturers, investment firms and investment advisors. The Disclosure Regulation also applies to firms giving advice on products but this article only considers the obligations that apply to FMPs.

When does it apply?

Obligations for firms under the Disclosure Regulation are phased in from March 2021 with the final obligations coming online in December 2022. During this time ESMA will publish further technical guidance to be adopted as secondary legislation, on the form and content of certain disclosures.

Because the Disclosure Regulation will shortly be in force, in the event that the UK leaves the EU, either with or without a transitional or implementation period, the Disclosure Regulation (although not its recitals) will form part of the body of EU law onshored into UK law and will continue to apply to the UK, unless the UK parliament legislates to the contrary. The ESMA technical guidance will not be so onshored, however, whether it is issued before or after the date on which EU cease to automatically apply to the UK, the FCA and HMT have announced that such guidance will remain persuasive to the extent that UK law remains the same as the EU law in respect of which ESMA gives that guidance.

The European Commission will review the application of the Disclosure Regulation by 30 December 2022 to determine whether it is inhibited by the lack or quality of data.

What does it mean for FMPs?

The Disclosure Regulation requires FMPs to make a number of disclosures to investors. We have set out a summary of the key requirements below:

Website publications

FMPs must publish on their websites:

  • information on their policies on the integration of “sustainability risks” in their investment decision making process (and keep this information up to date, explaining any amendments)
  • a statement on their due diligence policies with respect to the “principal adverse impacts” of their investment decisions on “sustainability factors”, or where these impacts are not considered, clear reasons why not and whether and when they intend to consider such impacts
  • certain information on any ESG-promoting product, sustainable product and carbon product (see below for further detail on these products), including data sources and screening criteria and indicators used to measure certain characteristics on the overall sustainable impact of the product

This information needs to be clear, succinct and understandable to investors and published in a way that is accurate, fair, clear and not misleading, simple and concise and in a prominent and easily accessible area of the website (and keep this information up to date, explaining any amendments).

Remuneration policies

FMPs’ remuneration policies must include information on how those policies are consistent with the integration of sustainability risks (and keep this information up to date, explaining any amendments).

Pre-contractual disclosures

Fund prospectuses (for UCITS and authorised AIFs) or other pre-contractual disclosures (for other products) must include descriptions of:

  • how sustainability risks are integrated into the FMPs’ investment decisions and the results of the assessment of the likely impacts of sustainable risks on the product’s return, or a clear and concise explanation if the FMP deems these risks not to be relevant
  • whether and how a product considers principal adverse impacts on sustainability factors (i.e. the negative impact of investment decisions) and a statement that further information is in the product’s periodic reporting (e.g. annual reports)
  • where a product, either solely or in part, promotes environmental and/or social characteristics, (an “ESG-promoting product”) information on how these characteristics are met (including certain details on any index used)
  • where a product has a sustainable investment objective and uses an index (a “sustainable product”), detail on how the index is aligned with the objective and how it differs from a broad market index (or where no index is used, an explanation on how the objective is to be attained)
  • if a product has a reduction in carbon emissions as its objective (a “carbon product”), the information must to include detail of how it will help achieve the long-term global warming objectives of the Paris Agreement (this links to the new Regulation on benchmarks contributing to sustainable finance and notes that if an index isn’t available, such products will need to include a detailed explanation of how the continued effort of attaining the objective of reducing carbon emissions is ensured in view of achieving the these global warming objectives)

Periodic reports

Periodic reporting (e.g. annual reports) must include:

  • information on principal adverse impacts on sustainability factors
  • whether and how a product considers principal adverse impacts on sustainability factors (and provide further information in the product’s periodic reporting – e.g. annual reports)
  • for a promoting product, the extent to which environmental and/or social characteristics are met
  • for a sustainable product or a carbon product, the overall sustainability-related impact of the product by means of relevant sustainability indicators, or, where an index is used, a comparison of the overall sustainability-related impact of the product with the impacts of the index and of a broad market index through sustainability indicators

Marketing communications

FMPs must ensure that any marketing communications are consistent with the disclosures they make in relation to the above.  "Marketing communications" is not defined in the Disclosure Regulation so FMPs will need to take care in preparing a broad spectrum of investor facing materials.

Does this only consider disclosures?

This is just a piece of the much larger and ever growing ESG puzzle. Although this part deals with some of the disclosures that will need to be made, ultimately the building blocks for these disclosures will be the result of updates to internal operations stemming from other requirements.

For example, the Disclosure Regulation should be considered in light of ESMA’s final report on integrating sustainability risks and factors into the UCITS and AIFMD Directives. That report focuses on the point that consideration of sustainability risks should form part of the normal practice of due diligence when considering investment risks, and updates are proposed to expressly refer to the consideration of these risks. This will require updates to policies and procedures, and FMPs will need to look at whether the right people are employed and engaged to drive this forward and monitor ongoing compliance.

In a similar vein, sustainability should be one of the factors being built into operational resilience planning. FCA, PRA and the Bank of England put out a joint discussion paper (DP 18/4) on operational resilience and whilst not explicitly mentioned there is no doubt that sustainability needs to be a key part of such planning.

In addition, the broader principle of acting in investors’ best interests needs to be considered. The recitals to the Disclosure Regulation comment that in order to comply with this principle, entities should integrate the consideration of sustainability risks and impacts into their processes, and explain to investors what they are doing, and the Disclosure Regulation maintains this requirement. The European Parliament briefing on the Disclosure Regulation also comments that “the identification, management and disclosure of ESG risks are an integral part of consumer protection and financial stability” and “among experts, there is a growing consensus that the consideration of ESG factors is compatible with fiduciary duties when ESG factors have a financial material impact on the investment performance or valuation”.

Will consistency of disclosures be achieved?

There is already divergence across the market as FMPs take different approaches, and apply different labels to ESG investing. Although the new requirements do go some way to harmonise what investors are told, arguably the definitions proposed still leave the risk of FMPs taking different views as to how they determine, for example, what constitutes a sustainability risk, what “contributes” to an ESG factor (and, indeed, the full extent of what can be classified as an ESG factor), and what is “material” when considering a negative impact on the financial return of a product.

The Investment Association’s final report on its Responsible Investment Framework (the “IA Report”), published recently, recognises that there is a lack of common language at national level. The proposed framework is likely to assist in coming to a common interpretation of ESG approaches at the level of both the FMP and the underlying product, but again this doesn’t mandate a set of agreed terms for the whole industry. The IA Report notes that the Investment Association is undertaking further work to assist investor understanding in this area, including looking at language in product documentation meaning further changes may be on the way for investment objectives and policies.

Although the publication of the technical standards (to be adopted as secondary legislation) will help FMPs to prepare disclosures in a similar format, entities are likely to have house views on the extent of the various definitions which will mean there could be differences between disclosures. In addition, in some cases the Disclosure Requirements set out just the minimum an FMP must disclose meaning some FMPs may be much more detailed in their disclosures than others.

Does this give FMPs all they need to start preparing disclosures?

The full extent and format of the disclosures is not detailed in the Disclosure Regulation, but powers are given to ESMA to develop technical standards which will hopefully assist in preparing such disclosures.

This means that: although FMPs should be alive to these requirements; steps should certainly be taken earlier rather than later to consider how these requirements apply; and to assess which polices and procedures need to be updated or prepared, and which department will have commitments/need resources. The specific updates to pre-contractual disclosures, websites and periodic reporting will not be confirmed for some time.


"sustainability risks" means an environmental, social or governance event or condition that, if it occurs, could cause an actual or a potential material negative impact on the value of the investment;

"sustainability factors" means environmental, social and employee matters, respect for human rights, anti-corruption and anti-bribery matters.

The Eversheds Sutherland ESG timeline

Our ESG timeline sets out current and forthcoming initiatives and developments to help you to keep abreast of this rapidly evolving area. The timeline and includes links to a wealth of materials and our briefings on other aspects of ESG.

How Eversheds Sutherland can help

Our team has been at the forefront of regulatory interpretation and product development for the fund management industry since the 1980s. Please get in touch if you would like further information on how the new regulation may affect you.