European Commission clarifies sustainability disclosure requirements

The European Commission has belatedly issued anticipated regulatory technical standards clarifying disclosure requirements for sustainability information on financial products. Another awaited standard, the Corporate Sustainability Reporting Directive, has also received a clear outline. The EU Council and the European Parliament have reached a provisional agreement on the wording of this regulation.

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Clarification of disclosure requirements on sustainability of financial products

The European Commission has adopted Regulatory Technical Standards (RTS) for the Sustainable Finance Disclosure Regulation (SFDR), which amend the content, methodology and scope of information to be reported under the SFDR. Under the SFDR, financial market participants must disclose information on the main adverse impacts of investment decisions at the entity and financial product level. Additional requirements apply to financial products promoting environmental or social performance (light green products) and financial products pursuing a sustainable investment objective (dark green products).

For entity-level disclosures, the RTS provide a mandatory reporting template with indicators that lead to major adverse impacts of investment decisions on sustainability factors. Reports will be submitted annually by 30 June, with the reference period being the previous calendar year.

For light green and dark green products, the RTS sets out mandatory templates for the pre-contractual disclosure of information about these products, rules for the disclosure of information about these products on websites, as well as mandatory templates for the disclosure of information in the periodic reports of financial market participants. For financial products that make sustainable investments, the RTS also introduces requirements to comply with the “do no significant harm” (DNSH) principle. In addition, in order to make the requirements for sustainable investments under the SFDR correspond to the requirements under the Taxonomy Regulation, financial market participants will have to provide information on whether sustainable investments comply with international law.

The RTS take the form of a delegated act, so once adopted by the European Commission, there is a period of review by the European Parliament and the Council of the EU. If approved by both institutions, the RTS will enter into force on 1 January 2023.

CSRD: Provisional agreement on new non-financial reporting rules

The Council of the EU and the European Parliament have reached an interim agreement on the form of the Corporate Sustainability Reporting Directive (CSRD). The CSRD amends the existing Non-Financial Reporting Directive (NFRD) and will bring more extensive reporting requirements for non-financial information by obliged entities on sustainability-related issues. In addition, non-financial information reported under the CSRD will have to be verified by an independent auditor.

Mandatory reporting entities for non-financial information under the CSRD will be:

  • All large enterprises
  • Small and medium-sized enterprises listed on regulated markets

The regulation will also apply to non-EU companies with a net turnover of €150 million within the EU and with at least one subsidiary or branch in the EU.

The new obligations will apply to obliged entities gradually in three waves:

  • From 1 January 2024 for companies subject to the NFRD
  • From 1 January 2025 for large enterprises not covered by the NFRD
  • From 1 January 2026 for listed small and medium-sized enterprises, small and not very complex institutions and captive insurance and reinsurance companies
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