Financial Services and Sustainability-Related Disclosures: The European Union's Perspective on Environmental, Social, and Governance Issues
The European financial services sector is witnessing a significant shift towards increased transparency and sustainability, with key initiatives and regulations setting the stage for a greener future.
One of the primary drivers of these changes is the Sustainable Finance Disclosure Regulation (SFDR), which requires financial market participants and advisers to provide clear and concise disclosures about sustainability risks, impacts, and sustainable investment objectives of financial products. The European Securities and Markets Authority (ESMA) has issued guidance to help firms comply with the SFDR, including clarifying how to disclose minimum proportions of assets allocated to environmentally and socially sustainable investments.
In August 2021, ESMA issued thematic notes outlining four principles for firms to avoid misleading sustainability claims (greenwashing), emphasising accuracy, accessibility, evidence-based claims, and up-to-date information for sustainability investment marketing. The European Banking Authority (EBA) is also consulting on amendments to product oversight guidelines addressing retail banking products with ESG features, aiming to balance preventing greenwashing with manageable regulatory burdens.
Another significant initiative is the Corporate Sustainability Reporting Directive (CSRD) together with the European Sustainability Reporting Standards (ESRS). The CSRD, which becomes fully operational for many companies reporting on 2024 financial years, mandates sustainability reporting aligned with ESRS. The European Commission has made amendments to reduce reporting burdens and allow phased implementation for large companies already reporting under the ESRS framework, avoiding additional requirements for 2025-2026.
The SFDR applies to a wide range of financial market participants and financial advisers, including UCITS/AIFs, their managers, VC funds, insurance-based investment products, manufacturers of pension products, and credit institutions. From June 2021, larger firms (>500 employees) will have to publish and maintain a statement on their websites on their due diligence policies with respect to the principal adverse impacts of investment decisions on sustainability factors. From 30 December 2022, larger firms will also have to make mandatory product-level disclosures.
The Disclosure Regulation requires product disclosures to include a clear and reasoned explanation of how a financial product considers principal adverse impacts on sustainability factors. For financial products with sustainable investment as their objective, the disclosure information must detail how the objective is attained, and where applicable, how the designated index is aligned with that objective. Where no index is designated, an explanation must be provided on how the objective is to be achieved.
Financial market participants must also ensure that the companies in which the investments are made follow good governance practices and provide further information in the product's pre-contractual disclosures on how these characteristics are met. Where the financial product with sustainable investment as its objective has no index designated as a reference benchmark, the pre-contractual disclosure information must include an explanation on how that objective is to be attained.
The Disclosure Regulation includes a very prescriptive definition of sustainable investment, which includes investments in economic activities that contribute to environmental or social objectives, provided that such investments do not significantly harm any of those objectives and that the investee companies follow good governance practices. ESG investments now amount to approximately one quarter of assets managed globally.
In summary, European sustainability disclosure initiatives involve layered regulations—SFDR for financial products, CSRD/ESRS for corporate reporting—and regulatory guidance focused on transparency, consistency, and anti-greenwashing. These shape how financial market participants and advisers communicate sustainability aspects, ensure compliance, and guide investment decisions in the EU financial services sector.
- The European financial services sector is embracing a shift towards greater transparency and sustainability, with regulations like the Sustainable Finance Disclosure Regulation (SFDR) setting the standard for a greener future.
- Financial market participants and advisers are required by SFDR to disclose sustainability risks, impacts, and sustainable investment objectives of their financial products, with guidance from the European Securities and Markets Authority (ESMA) to aid compliance.
- To avoid misleading sustainability claims (greenwashing), ESMA has issued thematic notes emphasizing accuracy, accessibility, evidence-based claims, and up-to-date information for sustainability investment marketing.
- The Corporate Sustainability Reporting Directive (CSRD) and European Sustainability Reporting Standards (ESRS) mandate sustainability reporting aligned with ESRS for many companies reporting on 2024 financial years.
- Financial market participants must ensure that the companies they invest in follow good governance practices and provide information on this in the product's pre-contractual disclosures.
- In education and self-development, understanding data-and-cloud-computing, technology, personal-finance, career-development, and environmental-science is crucial for navigating the evolving landscape of sustainable finance and wealth-management in the European financial services sector.
