EU authorities update disclosure regulation transition guidance

The three European supervisory authorities (ESAs) have updated their joint supervisory statement on the application of the regulation on sustainability‐related disclosures in the financial services sector (disclosure regulation). The updated statement (10-page PDF/231 KB) replaces the original joint supervisory statement published in February 2021.

The updated statement includes a new timetable for the implementation of the disclosure regulation, as the application of the regulatory technical standards (RTS) concretising it has been postponed. The European Commission announced on 8 July 2021 that it intended to bundle all 13 RTS on the disclosure regulation into a single delegated act. The application of the RTS was therefore postponed to 1 January 2023.

The new supervisory statement clarifies the ESAs' expectations towards market participants and national competent authorities to use the new transition period until 1 January 2023 to prepare for the application of the Commission's delegated act. At the same time, they should apply the measures of the disclosure regulation and also the EU's taxonomy regulation. According to the ESAs' statement, market participants must publish the first reports on the potential negative impacts of their products on environmental targets (PAI reports) for the year reporting period 2022 until 30 June 2023.

In addition, the authorities expect that all annual reports published or prepared from 1 January 2023 onwards will have to comply with the RTS. "Even though the implementation period has been eased a bit by the supervisory statement, financial market participants should use this time to prepare themselves operationally and with legal certainty with regard to the extensive reporting obligations that will be imposed on them," Dorothee Atwell, an investment fund and asset management expert at Pinsent Masons, said.

The ESAs also expect financial market participants to provide quantitative information in percentage in their prospectuses and annual reports on the extent to which the investments underlying their financial products comply with the taxonomy during the transitional period. If there are no business reports from the investee companies on this, fund providers and other financial services may determine the extent of taxonomy compliance on the basis of equivalent data obtained from the businesses themselves or from third-party providers. However, estimates are no longer permitted.

The ESAs are the European Banking Authority (EBA), the European Securities and Markets Authority (ESMA) and the European Insurance and Occupational Pensions Authority (EIOPA). Their joint supervisory statement is intended to help ensure that the disclosure regulation and Articles 5 and 6 of the taxonomy regulation are applied consistently in all member states. According to the authorities, this should create a level playing field in the EU and protect investors. Atwell: "This is very important, because uniform rules on the application of the disclosure regulation and the taxonomy regulation are essential to reduce the risks of so-called greenwashing and to enable a legally secure EU-wide distribution of taxonomy-compliant investment funds."

The disclosure regulation obliges financial market participants and financial advisors to inform their investors about the extent to which they take environmental and social standards into account. The businesses affected by the regulation must publish information on the social and environmental impacts of their financial products and information on investment risks arising from social and environmental factors. In addition to publications on the website of the financial service provider, the regulation also requires publications in pre-contractual information such as fund prospectuses, and also in annual reports.

The EU taxonomy regulation, on the other hand, creates a classification system for environmentally sustainable economic activities, which shall enable investors to assess whether projects and businesses they invest in have a positive impact on the climate and the environment. The EU's taxonomy system is thus intended to combat greenwashing and make the degree of sustainability of businesses more transparent. Businesses classified as sustainable will have easier access to capital on the financial markets and via state funding.