ESG factors’ paramount importance depicted in EU legislation

Regulation (EU) 2019/2088 on sustainability-related disclosures in the financial services sector (Disclosure Regulation, ESG Regulation or SFDR), as well as Regulation (EU) 2020/852 on the facilitation of sustainable investment (Taxonomy Regulation), form part of Commission's Sustainable Finance Action Plan, linking Environmental, Social and Governance (ESG) factors to financing and investment activities. See below a brief overview of the above legislative measures:

  • EU Disclosure Regulation:
    1. It establishes a framework defining the minimum ESG content to be disclosed by financial market participants and financial advisers with regard to, inter alia, the integration of sustainability risks in investment decision-making, as well as the consideration of adverse sustainability impacts. The disclosure obligations (pre-contractual, periodic and website) are broken down into mandatory and “comply or explain” ones, as well as entity and product level obligations.
    2. A number of new concepts, such as “sustainable investment”, “sustainability risk” and “sustainability factors” that financial market participants, as well as financial advisers, will need to consider when disclosing their approach to ESG are introduced.
    3. The relevant disclosure obligations will come into force on the 10th of March 2021.
  • EU Taxonomy Regulation:
    1. It establishes a unified, EU-wide taxonomy for assessing whether an economic activity qualifies as “environmentally sustainable”, for the purposes of establishing the degree to which an investment is “environmentally sustainable”, in accordance with one or more of the six specified environmental objectives.
    2. If the investment underlying a financial product is deemed "environmentally sustainable" under the taxonomy, the Regulation requires certain sustainability-related disclosures (pre-contractual, periodic and website) by the financial market participants in respect of said financial product (in addition to those required under the Disclosure Regulation).
    3. While the Taxonomy Regulation is already in force, the first of the disclosure obligations will not apply until the 1st of January 2022 at the earliest.

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