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Summaries of EU Legislation

Sustainability-related disclosures in the financial services sector

SUMMARY OF:

Regulation (EU) 2019/2088 on sustainability-related disclosures in the financial services sector

WHAT IS THE AIM OF THE REGULATION?

  • Regulation (EU) 2019/2088, adopted as part of the legislative framework for sustainable finance, lays down harmonised transparency rules for financial market participants1 and financial advisers2 on how they integrate environmental, social and good governance factors into their investment decisions and financial advice and on their overall and product-related sustainability ambition. It is designed to limit possible greenwashing – when financial products3 marketed as sustainable or climate friendly, or claims about financial businesses’ involvement, do not, in practice, satisfy those standards.
  • While the regulation sets out rules on disclosures, it effectively requires financial market participants and financial advisers to make strategic business and investment decisions, which they must then disclose.
  • The regulation brings further accountability, discipline and efficiency to financial markets and accelerates the competition in the fast-developing segment of sustainable finance. It also improves sustainability-performance-related information and comparability for end investors, and data and information for policymakers, supervisors, academia and civil-society organisations.
  • With comparable and reliable sustainability-related information on risks and impacts of investments, the regulation complements other initiatives fostering the financial system’s transition towards sustainability and continues to support businesses that are already sustainable.

KEY POINTS

The regulation makes a clear distinction between outside-in sustainability risks (environmental, social or governance (ESG) events or conditions that, if they occur, could cause an actual or a potential material negative impact on the value of an investment) and adverse impacts on sustainability factors (negative externalities on ESG conditions). The regulation also clarifies the potential positive sustainability impacts of investing.

Entity-level transparency / transparency by financial market participants and financial advisers

Financial market participants and financial advisers must publish on their websites:

  • information on how they consider the negative externalities of their business models, namely the principal adverse impacts of investment decisions or financial advice on ESG sustainability; or
  • information explaining why they consider there to be no such negative impact.

The websites of financial market participants and financial advisers must also include information on how:

  • they integrate sustainability risks into their investment decision-making process and financial advice;
  • their remuneration policies are consistent with integrating sustainability risks.

Financial product transparency

Sustainable financial products with various degrees of ambition have been developed to date. This is why this regulation distinguishes between the transparency requirements:

  • for financial products that promote environmental or social characteristics; and
  • for financial products that aim to have a positive impact on the environment and on society.

The two categories of financial products must explain how their ESG sustainability is to be achieved in pre-contractual financial-product-related documents4 and has been achieved in periodic financial-product-related documents5.

In addition, all financial products must:

  • specify in pre-contractual documents how sustainability risks are integrated into investment decisions; and
  • identify the possible impact on an investment’s profitability.

Similar rules apply to financial advisers. Financial market participants that consider principal adverse impacts on sustainability matters must also explain whether and, if so, how their financial products consider principal adverse impacts.

European supervisory authorities had to:

  • draft the necessary regulatory technical standards on the content, methodology and presentation of the relevant information and submit these to the European Commission by , , and ;
  • draft the implementing technical standards to determine the standard presentation of information on the promotion of environmental or social characteristics and sustainable investments;
  • report on best practices and make recommendations on voluntary reporting standards to the Commission by , and must report annually thereafter.

The report is made public and forwarded to the European Parliament and the Council of the European Union.

European Union (EU) Member States:

  • ensure the relevant authorities monitor compliance with the legislation;
  • may apply the regulation to manufacturers of pension products operating national social security schemes and to microinsurance intermediaries and investment firms.

The Commission:

  • can adopt regulatory and implementing technical standards;
  • had to evaluate the legislation by and consider whether to propose any amendments.

The regulation does not automatically apply to:

  • insurance intermediaries that provide advice on insurance-based investment products6 (IBIPs);
  • investment firms that provide investment advice and are enterprises irrespective of their legal form.

European single access point (ESAP)

Amending Regulation (EU) 2023/2869 incorporates into Regulation (EU) No 2019/2088 a new article concerning the accessibility of information on the European single access point (ESAP), established under Regulation (EU) 2023/2859 (see summary). The ESAP will provide access to public financial and sustainability-related information about EU companies and EU investment products. From , when making public sustainability risk policies, adverse sustainability impacts, how remuneration policies are consistent with the integration of sustainability risks, or the environmental or social characteristics of the financial products, the amending act requires the financial market participants and financial advisers to submit that information at the same time to the relevant collection body for the purpose of making it accessible on the ESAP. The amending regulation also sets out the conditions with which that information must comply.

Delegated acts

Delegated Regulation (EU) 2022/1288 supplements Regulation (EU) 2019/2088 with regard to regulatory technical standards, specifying the content, methodologies and presentation of the information in pre-contractual documents, on websites and in periodic reports relating to:

  • sustainability indicators and adverse sustainability impacts;
  • the principle of do no significant harm;
  • the promotion of environmental or social characteristics and sustainable investment objectives.

The act also requires financial market participants to disclose the extent to which their portfolios are exposed to gas- and nuclear-related activities that comply with the taxonomy regulation (see summary), as set out in the Complementary Climate Delegated Act.

These amendments aim to increase transparency and allow investors to make informed investment decisions.

The requirements and standards have applied since and the amendments have applied since .

FROM WHEN DOES THE REGULATION APPLY?

It has applied since , except for the rules on the transparency of adverse sustainability impacts, as far as they apply to financial market participants exceeding an average of 500 employees during the financial year or that are parent undertakings of a large group exceeding, on a consolidated basis, 500 employees during the financial year. In these cases, it has applied since .

BACKGROUND

  • Harmonised rules enable end investors to keep informed on the ESG impact of different financial products in different Member States.
  • Institutional investors, such as asset managers, pension funds or life insurance companies, invest on their clients’ behalf. Strict EU legal requirements covering a wide range of financial products, ranging from investment funds to personal pension products, ensure these investors act in their clients’ best interests.
  • The regulation introduces additional disclosure requirements on the environmental and social impact of investment decisions.

For further information, see:

KEY TERMS

  1. Financial market participant. All financial entities managing their clients’ money through financial products and that are an insurance undertaking that provides an IBIP; an investment firm that provides portfolio management; an institution for occupational retirement provision; a manufacturer of a pension product; an alternative investment fund manager; a pan-European personal pension product provider; a manager of a qualifying venture capital fund registered in accordance with Article 14 of Regulation (EU) No 345/2013; a manager of a qualifying social entrepreneurship fund registered in accordance with Article 15 of Regulation (EU) No 346/2013; a management company of an undertaking for collective investment in transferable securities (UCITS); or a credit institution that provides portfolio management.
  2. Financial adviser. This term covers all of the following: an insurance intermediary or undertaking that provides insurance advice with regard to IBIPs; a credit institution or investment firm that provides investment advice; an alternative investment fund manager that provides investment advice in accordance with Directive 2011/61/EU (on hedge and private equity funds); or a UCITS management company that provides investment advice in accordance with Directive 2009/65/EC on UCITS.
  3. Financial products. Investments, such as a portfolio, an alternative investment fund, an IBIP, a pension product or scheme, a UCITS or a pan-European personal pension product.
  4. Pre-contractual financial product-related documents. Documents that share information about financial products prior to an investor taking a decision to invest.
  5. Periodic financial product-related documents. Reports, generally issued on an annual basis, concerning the performance of specific financial products.
  6. Insurance-based investment products (IBIPs). A range of investment products marketed to retail investors that are subject to an investment risk. They include structured financial products, such as options, which are packaged in insurance policies.

MAIN DOCUMENT

Regulation (EU) 2019/2088 of the European Parliament and of the Council of on sustainability-related disclosures in the financial services sector (OJ L 317, , pp. 1–16).

Successive amendments to Regulation (EU) 2019/2088 have been incorporated into the original text. This consolidated version is of documentary value only.

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