ESG and the Commission legislative proposals for disclosures

Simon Lovegrove

Hello everyone and welcome to our latest financial services video on ESG. I am today joined by Beth Duff a manager in our Government Relations Team in Belgium. Beth, today I want to focus on the European Commission’s action plan on sustainable finance specifically disclosures which is one of the key pillars. To begin with, what is the mischief the Commission’s proposals are seeking to remedy? 

Beth Duff

So one of the objectives of the Commission’s action plan is to try and channel more capital towards sustainable investments. Now the Commission is of the view that in order to do so, sustainability risks and the impacts should be an integral part of investment decisions. So as you say, disclosures is one aspect of that. The Commission has proposed a regulation on disclosures relating to sustainable investments and their risks. Now this regulation imposes requirements on certain financial market participants and the idea is that they should consider the risks and the impact in their investment decisions. Furthermore, the Regulation will also increase the transparency of these investments for the end investors and that in turn should then encourage capital towards the sustainable investments. 

Simon Lovegrove

Beth, can you just now go into a little more detail about what changes the Regulation will bring?

Beth Duff

The Regulation can be considered in two parts. The first part applies to all firms within the scope of the regulation, now this includes MiFID II investment firms, portfolio managers, AIFMs, UCITs management companies as well as others, and these firms will be required to publicly disclose how and in which manner they consider sustainability risks. This means the risks to the returns of the investment, and sustainability impacts, meaning possible negative impacts of their investment decisions on sustainability. Similar disclosures are also required as a product label in pre-contractual disclosures. The second part of the Regulation applies only when firms are promoting sustainable investments as having such an objective or similar characteristics. These requirements for disclosure will apply to pre-contractual disclosures as well as in periodical reports. The idea of the second part is to ensure that firm’s claims regarding the objective of the investment are in fact credible and also that they can evidence that such objectives are achieved. 

Simon Lovegrove

And Beth what is the current status of the prudent person role?

Beth Duff

Interesting that you should say that actually as that certainly was one of the points which we focused on when we first looked at the draft proposal, but actually we are now at the stage where the co-legislators have considered the draft and in the final text that article is no longer there. 

Simon Lovegrove

Beth, to finish off with, when is the Regulation expected to apply?

Beth Duff

So as I mentioned, the co-legislators have considered and adopted the final text. It has yet to go through the formalities and is expected to be published within the coming two months. On the basis of that the first requirements will apply as of January 2020. The first requirements are only those around the periodical reports. The other requirements will apply around Q3 2020.

Simon Lovegrove

Thanks Beth. That concludes this Financial Services video. Goodbye.