EU confirms sustainability disclosure requirements for financial firms

The Disclosure Regulation, which was published in the EU Official Journal this week, is part of a package of measures announced by the European Commission last year to improve firms' consideration of environmental, social and governance (ESG) issues as part of their decision-making processes.

The regulation sets out harmonised rules for how financial firms and advisers should report on how their processes take account of sustainability risks and adverse sustainability impacts, as well as the way in which they communicate sustainability-related information about their products.

The requirements supplement those set out in a number of EU financial regulations and directives including the UCITS Directive; Solvency II Directive; Alternative Investment Fund Managers Directive (AIFMD); recast Markets in Financial Instruments Directive (MiFID II); and Insurance Distribution Directive (IDD).

The Disclosure Regulation will enter into force on 29 December and will apply from 10 March 2021.

Financial services regulation expert Elizabeth Budd of Pinsent Masons, the law firm behind Out-Law, said: "Sustainable investment is now an imperative rather than a 'nice to have'."

"The regulation sets out the transparency and disclosure obligations on firms looking at sustainable investment at different stages of the investment life cycle. However, with sustainable investing covering everything from climate change, to social cohesion, to governance, it is a wide-ranging subject and there still needs to be more consistency in how the industry reports in order that regulators and investors alike can assess different services and products," she said.

"With the regulation applying from March 2021 subject to some carve-outs, firms do need to address without delay how they are going to meet these obligations for services and products," she said.

Last month the Investment Association (IA), a trade body representing the global asset management industry, published what it described as the first set of common terms for defining and categorising "responsible" funds, meaning those with a focus on environmental or socially good outcomes. The European Banking Authority (EBA) published its own action plan on sustainable finance last week.

The EU is making progress on two other strands of its sustainable finance package. A new Low Carbon Benchmarks Regulation has also been published, creating new categories of benchmarks aligned either to climate transition goals or the Paris agreement objective of limiting global warming to below two degrees Celsius. Work is also progressing on the creation of an EU-level taxonomy for classifying what constitutes sustainable economic activities.