EU Disclosure Regulation
A regulation on sustainability-related disclosures in the sector of financial services has been published in December 2019 on the Official Journal of the European Union (find a link to the regulation here). Nicknamed already by the industry as the EU Disclosure Regulation, or simply Disclosure Regulation, for it introduces transparency requirements on both market participants and financial advisors alike, the regulation is part of the coordinated action to shift towards sustainability in the finance industry at global level.
Notwithstanding the lack of level 2 regulation, which indeed should come by at the end of December 2020, just before the entry into force of the regulation in 2021, this post aims at providing some background information along with considerations on the new transparency obligations.
Background of the EU Disclosure Regulation and the United Nations 2030 Agenda
The EU Disclosure Regulation is one more step 
towards ensuring that financial markets, participants and their products take in due account sustainability and impact investing. This piece of regulation in particular aims at ensuring that sustainability factors and risks are disclosed to investors properly, with imposition of requirements at two levels, with regards to the integration in the investment and advice process of sustainability risks and considerations on the adverse sustainability impact as well as the provision of sustainability related information of financial products.
One of the acquis of the financial crisis has been that sustainability was not at all a theme considered in the financial markets. The crisis demonstrated very eloquently how some of the objectives pursued by various players in the financial markets have been short termed, oblivious to the long-term impacts that investment strategies have on the broader worldwide economy and overall environment. The EU Disclosure Regulation follows from the work of the United Nations with the 2030 Agenda, the Europe 2020 programme of the European Commission and lastly the Capital Markets Union. The 2030 Agenda of the United Nations (please find a link to the document here) enucleated already in 2015 some Sustainable Development Goals and targets, with specific attention to the promotion of sustained, inclusive and sustainable economic growth, full and productive employment and decent work. The 2030 Agenda focussed also on the role of institutions worldwide to build resilient infrastructure, promote inclusive and sustainable industrialization and foster innovation. From a European standpoint, these goals are replicated both in the Europe 2020 programme as well as in the Capital Markets Union. And whilst sustainability has already been the topic of a consultation paper issued by ESMA in December 2018 on the integration of factors and risks of sustainability in the UCITS and AIFM directive (we discussed about it already in another blogpost here), the EU Disclosure Regulation represents one more pivotal piece of regulation that completes the previous measures on sustainability and impact investing.
What does the EU Disclosure Regulation intend to achieve in practice?
The main premise of the regulation is that for sustainability to become one of the drivers of the investment selection process for institutional investors, transparency is required as to how sustainability risks, adverse impacts on sustainability or the promotion of environmental and social characteristics are dealt with both within the investment process and the actual advice on investments. The EU Disclosure Regulation seeks to ensure that transparency on the above-mentioned sustainability related issues is achieved in an organic and homogeneous manner at European level. Consistent practice on disclosure across Europe on sustainability will have positive effects at various levels. It will benefit investors in the selection process and prevent that different practices can emerge across the various member states, distorting competition. It will prevent that different market practices can evolve across European member states, driven by priorities commercial in nature, representing barriers to the evolution of truly interconnected capital markets across Europe. Consistent transparency will ultimately ensure that capital markets across Europe can thrive and make more resilient the overall European economy.
Now the technical bit – who needs to do what?
The EU Disclosure Regulation is addressed to financial market participants and financial advisers and will capture a broad array of financial products. For what we are concerned, we can conclude safely that the EU Disclosure Regulation will apply to the usual suspects. Alternative Investment Fund Managers, UCITS Management Companies as well as MiFID firms providing portfolio management services or investment advice will have to grasp with the new requirements on disclosure. UCITS and AIFs will largely fall under the definition of financial products under the regulation along with portfolios managed by MiFID firms or other credit institutions.
It is noteworthy to mention that an important part of the disclosure will be in digital format and will take place on the websites of both financial market participants as well as investment advisers. Taking stock of the development in the digital consumption of financial services, the regulation seems to intend to keep disclosure available to investors through the means normally utilised for communication between them and the financial market participant or investment advisers. The choice of the digital format has also some other inevitable advantages. It will make disclosure more readily available to investors, compliance with the regulation less cumbersome and also more immediately auditable.
The rest of the disclosure will have to take place in a documental way, by means of precontractual disclosures and in periodical reports, with an obligation placed both on the financial market participant and the financial adviser for the precontractual disclosures. The EU Disclosure regulations hints also at periodical review of the disclosure. Any amendments made to pre-existing disclosures shall bear an explanation published on the same website. Pursuant to the regulation, related marketing communications shall also be in line with the contents of the disclosure.
Extra territorial effects of the EU Disclosure Regulation
The level 2 regulation will clarify further the obligations and hopefully will give sufficient time to ensure compliance in 2021. Whilst the EU Disclosure Regulation does not contain explicit extraterritorial effects, the question is whether this will also be applicable to financial market participants based outside of Europe for their non-European financial products.
Of course, sustainability is gaining momentum on both sides of the Atlantic and, despite nuisances in the various jurisdictions, the trend follows the guidelines given by the United Nations in the 2030 Agenda, amongst the others. We expect that non-European managers will make their decision for compliance based on purely commercial reasons, rather that strictly regulatory ones, and will implement disclosure both in digital and documental format in order to compete within European borders.