As the EU focuses increased attention on a greener future, and adopts measures for member states to ensure they implement environmentally sustainable goals at a national level, the EU has also turned its focus to the work that can be done by companies and financial institutions to reduce investment greenwashing.
As part of this approach, the EU has introduced the EU Sustainable Finance Disclosure Regulation (EU) 2019/2088 (the “Regulation”) which forms part of the European Commission’s Action Plan for achieving sustainable growth. This Regulation imposes strict disclosure requirements upon financial market participants and financial advisers to demonstrate how they have integrated sustainable risks and decision-making within their investment decisions and recommendations. The disclosure obligations came into effect on 10 March 2021.
Whilst there is growing recognition over the importance of providing information about sustainability and more businesses are examining their environmental impact, the provision of such information to investors has, to date, been inconsistent. The Regulation seeks to bring uniformity in approach and to enhance transparency, improving how sustainability information is disclosed in the financial sector, thereby overcoming some of the problems associated with greenwashing.
What are the key disclosure obligations?
It is no longer enough for financial market participants and financial advisers to simply state that the funds they offer or advise on are ‘sustainable’. Instead, the Regulation requires that this information be provided to the market, demonstrating how sustainability risks have been integrated within investment decision-making or insurance advice; and disclosing how any adverse sustainability issues have been considered in their investment decisions.
The Regulation introduces disclosure requirements relating to:
- how sustainability risks can cause a negative impact to the value of an investment (including the risk of depreciation of assets owing to environmental and/or social concerns);
- how investments can contribute to environmental and/or social objectives; and
- how investment decisions may have an adverse impact on sustainability (including the impact upon the environment, social and employee issues, human rights, anti-bribery and anti-corruption).
The Regulation provides clarity with regards to which financial products will be deemed to be in scope and will require such information to be provided – this includes investment and mutual funds, insurance based investment products, and insurance and investment advice.
The Regulation requires that in respect of these in scope financial products, information will now need to be disclosed in pre-contractual documents as to whether and how their financial products either promote or present risks for sustainability.
Further, financial market participants and financial advisers will also have to detail how they have considered sustainability risks within the context of their investment decision-making or advice. The Regulation also requires them to provide information as to how sustainability risks have been factored into their remuneration policies.
The Regulation also provides disclosure obligations for financial market participants and financial advisers in respect of the information that they publish and maintain on their websites (including information about their policies on the integration of sustainability risks). Financial market participants may also publish on their websites statements on the due diligence processes with respect to the adverse sustainability impact of their investment decisions.
Following the UK’s exit from the EU, the Regulation will still be relevant for UK firms with a presence in the EU financial market. The UK is also currently working to establish its own mandatory climate related disclosures in line with the recommendations made by the Task Force on Climate Related Financial Disclosures.
The end of investment greenwashing?
The disclosure obligations set out in the Regulation respond to increasing calls by investors for clarity over the sustainability of financial products. These obligations will provide improved transparency, consistency and accuracy in respect of the sustainability of financial products, and the assessments of sustainability risks when financial market participants and financial advisers make investment decisions and provide advice.
Through these improvements in the provision of information, it is anticipated that investors will have greater visibility over questions relating to sustainability and the environment, ultimately providing investors with greater confidence to make sustainable investments. This in turn should see an increased trend towards truly sustainable investments and away from investment greenwashing.
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