- The regulation requires fund managers and financial advisers to report how they integrate sustainability risks.
- Products presented as sustainable or with environmental or social characteristics will have to explain it in detail.
- It will apply from 10 March 2021 and aims to combat green-washing.
On 9 December 2019, Regulation (EU) 2019/2088 of 27 November on sustainability-related disclosures in the financial services sector was published in the Official Journal of the European Union. It is one piece of the European Union’s plan to steer savings towards more sustainable investment. It imposes new transparency obligations on financial market participants, such as fund managers, insurers offering investment products or advisers.
As a regulation, it applies directly in all Member States, without the need for national law. Its general provisions will apply from 10 March 2021, giving institutions more than a year to adapt. Technical details, such as the format of the information, will be specified in later rules to be drawn up by the European supervisory authorities. The European supervisory authorities are expected to publish detailed technical standards, which will specify the content and format of the information.
What it requires them to explain
The regulation requires information on three main questions. The first, how sustainability risks are integrated, that is, environmental, social or governance events that could affect the value of an investment, in investment decisions or advice. The second, whether the adverse impacts of decisions on sustainability factors are taken into account. The third, what products are like that claim to promote environmental or social characteristics, or to have a sustainable investment objective.
When a product is advertised with sustainable objectives, the institution must explain precisely what this involves, how it measures compliance and whether the reference index is consistent with those objectives. The idea is that the label should not be an empty marketing claim and that investors can compare products on similar criteria. Remuneration policies are also required to explain how sustainability risks are integrated, which links managers’ incentives to these criteria.
Why it is being done
The European Union has taken on climate goals that require mobilising large investments, and wants the financial sector to contribute. For that, information must be comparable and reliable. Without rules, institutions could describe their products as “green” or “sustainable” on very different criteria, which created confusion and the risk known as greenwashing.
The regulation does not oblige anyone to invest in a particular way nor ban products that are not sustainable. Its function is that whoever offers a product or advice says clearly what it does and does not do in this area, and that investors decide with more information. This benefits above all the retail investor, who until now had difficulty understanding what exactly one “green” fund meant compared with another.
What to review
For investors, the reasonable course is to read carefully the sustainability information received from managers or advisers from 2021, and to ask if it is not clear. An attractive label does not replace analysis of the real composition of the portfolio, the costs and the risk.
For companies offering investment products or services, it is time to start reviewing procedures, remuneration policies and the information provided, and to follow the technical development of the regulation. This text is general information. Consult your adviser to assess how it affects you. If you hold savings or investment products, you can ask your institution how the regulation will apply and what additional information you will receive.
Sustainability in finance moves from slogan to a duty to explain.
This article is general information. It is not legal, tax or investment advice, and it does not take anyone’s particular circumstances into account.
