Sustainability-Related Disclosures in European Funds
EU encourages businesses to frame decisions in terms of financial, environmental, social, and human effects ensuring resilience and long-term value creation. But such disclosures used by European funds must not be misleading.
The European Securities and Markets Authority (ESMA) has clarified the conditions under which certain terms related to sustainability may be used in EU investment fund names and the information that management companies claiming to be sustainable must disclose in their terms and conditions, prospectuses, websites, marketing materials, and annual reports.
Regulation (EU) 2019/2088 (8): As the Union is increasingly faced with the catastrophic and unpredictable consequences of climate change, resource depletion and other sustainability‐related issues, urgent action is needed to mobilise capital not only through public policies but also by the financial services sector. Therefore, financial market participants and financial advisers should be required to disclose specific information regarding their approaches to the integration of sustainability risks and the consideration of adverse sustainability impacts.
ESMA's guidance is intended to improve supervisory convergence on sustainable investment funds and provide guidance to supervisors on how to address greenwashing. However, the fund managers can use the guidance for self-assessment to determine whether their current activities are in line with ESMA principles.
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The ESMA principle states that the name of sustainable funds must not be misleading and a fund's claims to its investors and its actual investments must be aligned.
ESMA34-45-1427 (29): Funds’ names should not be misleading, as the disclosure of sustainability characteristics should be commensurate with the effective application of those characteristics to the fund. The use of terms such as “ESG”, “green”, “sustainable”, ”social”, “ethical”, “impact” or any other ESG-related terms should be used only when supported in a material way by evidence of sustainability characteristics, themes or objectives that are reflected fairly and consistently in the fund’s investment objectives and policy and its strategy as described in the relevant fund documentation.
ESMA's guidelines also highlight what information financial regulators should review in fund managers' annual reports and websites and how they should do so. The information given to investors to enable them to evaluate proposed funds must be accurate, fair, clear, not misleading, simple and concise, both in the annual report and on the website. Sustainable objectives and features must be clearly identified. The fund's investment objectives and policies and strategy and the publicly disclosed information must be consistent and not misleading to investors.
The risks related to sustainability should be documented in the company documents and be available for investors. Management companies have been communicating on non-financial matters such as Corporate Social Responsibility (CSR) for decades, widening into Environmental, Social, and Governance (ESG) matters more recently. One of the latest parts of this evolution is an enterprise-wide approach to sustainability that incorporates opportunities and risks over the long term. Many risk managers have been involved in their companies' reporting on sustainability, for example, the preparation of their non-financial reporting disclosures, annual reports, or sustainability reports. But a risk manager's primary role is to warn and anticipate rather than to report.
Managers are at different stages of maturity in their sustainability approach and have different ways of identifying, analysing, assessing and dealing with the risks and opportunities. Such risks relate to the ESG practices of the business, its strategy and the sector and territories in which it operates.
AlphaLAW recommends to specify all necessary information related to CSR and ESG in the fund's prospectus and other company documents. That is also applicable to risks related to sustainability. Contact AlphaLAW in case you need any support for your investment structure related to ESG matters.
