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Freshfields Transactions

| 6 minutes read

ESG disclosure: making sustainability transparent

Directing private capital towards climate and environmental action is crucial for a successful transformation of the global economy for a sustainable future.

Such reallocation of capital requires not only a consensus on eligible investments ('taxonomy') and appropriate incentives, but also transparency with respect to the use of investment proceeds.

Increasing disclosure and expanding reporting on environmental, social and governance (ESG) performance is therefore also a cornerstone of the European Green Deal, as evidenced by the 2019 EU disclosure regulation.

Recent statements from leading international financiers also confirm an ever-increasing interest of capital providers in the 'green-ness' of their investments, thereby strengthening the case for meaningful ESG disclosure.

Against this background, it is worth considering currently applicable ESG disclosure rules within the EU as well as legislative proposals in the pipeline.


From the perspective of an (operative) company, existing ESG-disclosure obligations may apply, if the company:

  1. qualifies as 'large undertaking which is a public-interest entity'; or
  2. issues 'green' or 'sustainability-linked' instruments in accordance with a relevant framework; or
  3. participates in the capital markets and thus is subject to the EU prospectus regime.

Non-financial (ESG) reporting by large, public-interest entities

A company must normally prepare a non-financial report in accordance with the 2013 accounting directive if it:

  1. has either a balance sheet total of €20m or a net turnover of €40m; and
  2. has more than 500 employees on average; and
  3. is either a listed entity, a credit institution, an insurance undertaking or otherwise a public-interest entity (eg due to the nature of its business, its size or the number of employees).

The report must also cover:

  • environmental, social and employee matters in relation to the company’s business model and strategy;
  • its governance and control systems;
  • its policy outcomes; and
  • the principal risks and risk management.

These matters must be considered by reference to:

  • the company’s own development, performance and position ('impact on the company'); and
  • the impact of the company’s activity on its environment ('impact of the company').

Matters that are 'material' in one respect or the other should be disclosed in the ESG report. As markets and public policies evolve in response to climate change, the two aspects will increasingly overlap and the impact of a company’s business on the environment will more and more translate into an impact on the business itself (eg higher susceptibility to policy, legal or reputational risks).

Where relevant and proportionate, a company (including financial service providers) must consider their whole value chain, both upstream and downstream for the purposes of the ESG report.

Reporting companies should therefore consider contractually obliging their suppliers to provide the relevant data and information so that they can comply with their reporting obligations.

The legislator envisages that ESG reporting will form part of the management report. In practice, it is sometimes produced as a stand-alone document, which is permissible if the ESG report is also made available to the public.

Companies may rely on recognised reporting frameworks and standards (eg the Global Reporting Initiative, the OECD framework and the UN Global Compact) when preparing the ESG report.

Further, the EU Commission has itself issued non-binding guidelines on reporting climate-related information and guidelines on non-financial reporting to complement the 2013 accounting directive.

The content of the ESG report will not normally be reviewed by the (statutory) auditors of the company (although they may need to confirm that an ESG report has been prepared).

Green bond principles and other (voluntary) frameworks

Issuers and borrowers of green (or sustainability-linked) instruments that have voluntarily undertaken vis-à-vis their investors to abide by a relevant framework may find themselves subject to specific reporting or disclosure obligations thereunder.

These may vary from framework to framework, but would often include:

  • allocation reporting – regularly (ie until full allocation) updated information on the use of proceeds and the allocated amounts under the bond or loan; and
  • impact reporting – a brief description of the relevant projects funded by the proceeds generated under the bond or loan as well as the expected impact.

The ICMA Green Bond Principles (which serve as model for the LMA Green Loan (PDF) and the LMA Sustainability Linked Loan (PDF) principles) recommend the use of qualitative performance indicators and, where feasible, quantitative performance measures (eg energy capacity, electricity generation and greenhouse gas emissions reduced/ avoided) as well as the disclosure of the underlying methodology and/or assumptions used in the quantitative determination.

Additional (voluntary) guidance as well as reporting templates are provided by the ICMA for impact reporting.

General disclosure requirements applicable to capital markets issuers

Where securities are offered to the public within the EU, the issuer would – in most circumstances and irrespective of whether the securities are sustainability linked or not – be required to prepare a prospectus in accordance with the 2017 EU prospectus regulation.

While the EU prospectus regulation does not expressly provide for ESG-related disclosures, it expressly recognises that 'environmental, social and governance circumstances can also constitute specific and material risks for the issuer and its securities and, in that case, should be disclosed' (see recital (54)).

This 'materiality' test differs somewhat from the non-financial reporting test as it concerns risks to the issuer rather than the environment per se. As explained above, however, it is likely that environmental risks will in many cases overlap with issuer risks.

To the extent ESG-related circumstances meet the materiality test, such circumstances would have to be disclosed as part of the risk factors included in the prospectus.

The issuers (and its administrative, management or supervisory bodies, respectively), the offeror, the person asking for admission of the securities to trading on a regulated market or a guarantor may be liable for the information under the general liability regime provided for in the 2017 EU prospectus regulation.

Investors, asset managers and other financial market participants

EU disclosure regulation: new rules for portfolio managers, other financial market participants and financial advisors

Alternative investment fund managers, UCITS-management companies, certain insurance companies, pension product providers, portfolio managers and managers of European venture capital funds and European social entrepreneurship fund (ie so called 'financial market participants') and financial advisors will – from 10 March 2021 – be subject to specific ESG-related disclosure obligations – in particular, regarding certain qualifying 'financial products' (such as alternative investment funds, undertakings for the collective investment in transferable securities, pan-European personal pension products, pension products or schemes, insurance-based investment products and managed portfolios).

It is important to note that these disclosure rules do not apply to the underlying assets but rather 'bite' at the level of the investment undertaking or portfolio manager.

Financial market participants and financial advisors must, among other things, disclose:

  • information about their policies on the integration of sustainability risks in their investment decision-making process or advice;
  • information on the assessment of adverse impacts of investment decisions (including information on due diligence or, where permitted, reasons for not considering such impact); and
  • how their remuneration policies are consistent with and integrate  sustainability risks.

Enhanced disclosure obligations apply where the environmental or social characteristics (or a combination thereof) of a financial product are promoted or the financial product has sustainable investment as its objective.

Transparency of asset managers and certain institutional investors

Under the 2007 directive on long-term shareholder engagement, certain investment managers, and life insurance and occupational retirement scheme providers may have to disclose how they plan to engage shareholders with their investment strategy, including a description of how they monitor investee companies on, among other things, their social and environmental impact and corporate governance.

What’s next?

The EU Commission is currently considering further amendments and clarifications to the CSR directive, which aim to foster higher quality non-financial information and contemplate extending its scope to, for example, large, non-public-interest entities. A public consultation on these matters is currently ongoing until 14 May 2020.

As work on the EU taxonomy regulation and the relevant regulatory technical standards is progressing, further disclosure obligations (eg on the extent of the sustainability of financial products) will come into play. It is very likely that continuing digitisation will also have impact the format and content of ESG-related disclosure in the future.

In addition, a market-standard is being developed around voluntary frameworks (such as the ICMA Green Bond Principles), which serve as model for ESG reporting in a broader context.

Finally, a growing interest from investors in meaningful ESG disclosure may prompt further regulatory initiatives and force issuers or borrowers that are not currently subject to any ESG disclosure obligations to voluntarily disclose ESG-related matters when seeking external funding.


sustainable finance, europe, financing and capital markets, sustainability, corporate governance