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Sustainability-related disclosure in the financial services sector

What the obligations are for manufacturers of financial products and financial advisers towards end-investors.

Regulation on sustainability-related disclosure in the financial services sector

The Commission put forward the action plan on financing sustainable growth in March 2018. As part of action 9 of the action plan – on strengthening sustainability disclosure – the European Commission followed through on this action in May 2018 with a proposal for a regulation on disclosures relating to sustainable investments and sustainability risks and amending Directive (EU) 2016/2341. The proposal was adopted as part of the sustainable finance package.

The disclosures regulation was adopted by co-legislators in spring 2019 and was published on 9 December 2019 in the Official Journal. It applies from 10 March 2021.

It lays down sustainability disclosure obligations for manufacturers of financial products and financial advisers toward end-investors. It does so in relation to the integration of sustainability risks by financial market participants (i.e. asset managers, institutional investors, insurance companies, pension funds, etc., all entities offering financial products where they manage clients’ money) and financial advisers in all investment processes and for financial products that pursue the objective of sustainable investment.

In addition, the co-legislators added disclosure obligations as regards adverse impacts on sustainability matters at entity and financial products levels, i.e. whether financial market participants and financial advisers consider negative externalities on environment and social justice of the investment decisions/advice and, if so, how this is reflected at the product level. The reason is that investment decisions and financial advice might cause, contribute to or be directly linked to negative material effects on environment and society, regardless of whether the investment strategy pursue a sustainable objective or not, such as investments in assets that pollute water or devastate bio-diversity, to ensure the sustainability of investments.

It consists of a directly applicable regulation introducing additional disclosure requirements to the existing elements of relevant sectoral legislations (AIFMD, UCITS, Solvency II, IDD and MiFID II), via a self-standing text (lex specialis) providing full harmonization, cross-sectoral consistency and regulatory neutrality.

Regulatory Technical Standards

The European Commission adopted on 6 April 2022 technical standards to be used by financial market participants when disclosing sustainability-related information under the Sustainable Finance Disclosures Regulation (SFDR). This Delegated Regulation specifies the exact content, methodology and presentation of the information to be disclosed, thereby improving its quality and comparability. Under these rules, financial market participants will provide detailed information about how they tackle and reduce any possible negative impacts that their investments may have on the environment and society in general. Moreover, these new requirements will help to assess the sustainability performances of financial products. Compliance with sustainability-related disclosures will contribute to strengthening investor protection and reduce greenwashing. This will ultimately support the financial system’s transition towards a more sustainable economy.

After the scrutiny period, the Delegated Act was published in the Official Journal on 25 July 2022. The requirements apply from 1 January 2023.

On 31 October 2022, the European Commission adopted amendments to this Delegated Regulation to require financial market participants to disclose the extent to which their portfolios are exposed to gas and nuclear-related activities that comply with the Taxonomy, as set out in the Complementary Climate Delegated Act (CDA). By increasing transparency, these amendments will allow investors to make informed investment decisions.

These amendments are now subject to scrutiny by the European Parliament and the Council.