The three European Supervisory Authorities, EBA, EIOPA and ESMA, (collectively the "ESAs") have published a Consultation Paper on  23 April 2020 (the "Consultation") seeking responses to proposed environmental, social and governance ("ESG") disclosure standards for financial market participants, advisers and products. The ESAs are a joint committee with the aim of strengthening cooperation between the three bodies, and regularly exchange information.

This Consultation follows ESMA's annual report on corporate disclosures and enforcement published earlier this month. This report highlighted the current inadequacy of ESG disclosure rules. Twenty per cent of issuers did not provide any information about climate change and only ten per cent provided disclosure in a boilerplate fashion, although the majority of issuers are providing sufficient disclosure under the current rules.

Underlying the Consultation is the  Sustainable Finance Disclosure Regulation ("SFDR"). The SFDR’s scope is very broad and covers nearly every sustainable finance product on a cross-sector basis. The Consultation includes draft Regulatory Technical Standard ("RTS") i.e. a binding standard that implements or supplements EU legislation designed by the ESAs which may be adopted by the European Commission. In their impact assessment, the ESAs have noted that it is likely that the will set out more detail than just "high-level" principles, despite the implementation challenges this will have.

Consultation aims

The aims of the Consultation are to establish six areas of disclosure:

  1. Details of the presentation and content of the information to be disclosed in relation to the principle of "do no significant harm" ("DNSH"), which we discuss in further detail below), including a mandatory template for "adverse impact reporting" and indicators setting out "significant harm";
  2. Pre-contractual information on how a product with environmental or social characteristics should meet those characteristics, including a mandatory reporting template and how the product complies with the DNSH principle;
  3. Additional pre-contractual information, where there is a designated index as a reference benchmark, on how that index is aligned with the sustainable investment objective;
  4. A statement to be published on an entity's website on their due diligence policy in respect of the adverse impact of investment decisions;
  5. The information to be published on an entity's website, including where and how the information should be published, including a two-page summary document and how the product complies with the DNSH principle. It is likely that financial product manufacturers will have to declare methodology and data sources to prevent 'greenwashing' by using benchmarks or sustainable labelling; and
  6. Periodic reporting (under sector specific legislation), including a mandatory reporting template, a granular list of items to be included in the reporting, focusing on the success of the product meeting sustainable characteristics and objectives and how the product complies with the DNSH principle.

The DNSH principle

From these broad aims, it is clear that the core theme of the consultation is the DNSH principle.  This is a relatively new regulatory concept and is intended to flow across all formats of ESG disclosures. Because of this, questions to the Consultation’s respondents are heavily focused on the review of Annex 1 of the RTS, which sets out these considerations.

The recent EU Green Bond Standard (the "Standard") also relies on a similar principle of significant harm i.e. avoiding significant harm to the four other environmental objectives: sustainable use and protection of water and marine resources, transition to a circular economy, pollution prevention control, and protection and restoration of biodiversity and ecosystems.

The Standard is supplemented by the EU Taxonomy, to be established by the EU’s Taxonomy Regulation, which sets out in more detail the criteria the market may rely on to assess the ESG aspects of a product. The Taxonomy uses a variety of technical measures over three categories to test the sustainability of a product. The three categories being: substantive contribution to the EUs six environmental objectives; DNSH; and meeting the minimum safeguards such as the UN Guiding Principles on Business and Human Rights.

The Consultation notes within the impact assessment that the sector-specific indicators set out under Article 12 of the Taxonomy Regulation, may not align perfectly with the draft RTS within the Consultation.


If all the factors in Annex 1 of the draft RTS are used, this is likely to be costly due to the number and variety of indicators. One proposal is that entities may be allowed to disclose their own thresholds of significant harm against the 32 criteria set out in Table 1 of Annex 1 in the RTS, regardless of whether these meet the Taxonomy Regulation and Standard or not.

Businesses already surveyed for the Consultation’s impact assessment have indicated that they are expecting they will need external information or analysis in order to provide the required disclosures. Several of the indicators require calculations with reference to other regulatory definitions. The Consultation also notes that it is important to bear in mind the comply or explain nature of the SFDR.  Resultantly, financial market participants and financial advisers will be able to publish a statement that they do not take adverse impact of their investment decisions on sustainability factors into account.  36 months after the RTS will have entered into force, all companies with 500 or more employees will no longer be able to explain why they do not take into account such adverse impacts of their investment decisions on sustainability factors.  So the ESA’s working group believes it is important to ensure a balanced approach that does not unnecessarily deter financial participants and financial advisers from option out of making disclosures under the SFDR’s comply or explain regime.

Consultation feedback

The deadline for feedback on the Consultation is 1 September 2020, with a view to sending the resulting RTS to the European Commission for approval before the end of this year.

Businesses which are likely to be affected by the Consultation may also wish to respond to the FCA’s consultation on their proposals to enhance climate-related disclosures by listed issuers and clarification of existing disclosure obligations. The deadline for the FCA’s consultation has been extended as a result of the ongoing coronavirus pandemic and will now close on 1 October 2020.