On December 9, 2019, Regulation (EU) 2019/2088 on sustainability‐related disclosures in the financial services sector (“ESG Disclosure Regulation”) was published in the Official Journal of the EU. This Regulation was enacted as part of the European Commission’s Action Plan on Financing Sustainable Growth and it shall take effect on March 10, 2021.
The purpose of the ESG Disclosure Regulation is to enhance transparency regarding the consideration of sustainability risks in investment decisions and insurance or investment advice. A sustainability risk is defined as an environmental, social or governance event (“ESG”) or condition that, if occurred, could have a negative material impact on the value of an investment. As a result, financial market participants will be required to implement policies and make disclosures regarding sustainability risks and adverse impacts on sustainability matters at entity and financial products level.
The provisions of this regulation are directly applicable to all financial market participants (as defined in the ESG Disclosure Regulation), including AIFMs, UCITs management companies, investment firms, insurance and credit institutions providing portfolio management, as well as to financial advisers providing investment and/or insurance advice. Despite the Brexit, the ESG Disclosure Regulation will be implemented in the UK and will apply to UK AIFMs, UCITS management companies and portfolio managers authorised under MiFID/ MiFID II.
The ESC Disclosure Regulation is another step towards value-based investment, which applies environmental, social and governance factors when making investment decisions instead of relying purely on financial considerations. Despite the reduction in investment options which this may entail, world-class pension and sovereign funds are increasingly applying screening methods or are excluding non-ESG options (e.g. tobacco or nuclear weapon manufacturers, producers with links to animal cruelty) in integrating ESG in their investment strategies.