ESMA Publishes Expected Sustainability Disclosures in Prospectuses
As this newsletter moves into a more sustainable future with eco-friendly Exlibris, so does the EU’s financial markets regulator and supervisor, the European Securities and Markets Authority (“ESMA”). In light of its 2023-2028 strategy, ESMA supports the Environmental, Social and Governance (ESG) transition by taking regulatory or supervisory actions in this area while maintaining investors’ confidence in ESG investments by promoting high-quality sustainability disclosures and hence reducing the risk of greenwashing. Consequently, on 11.07.2023, ESMA issued its public statement (“Public Statement”) outlining its expectations on sustainability-related disclosures provided in prospectuses for both equity and non-equity securities.
Despite being primarily addressed to the EU National Competent Authorities (NCAs), the Public Statement is also intended to be considered by issuers and advisors when drawing up prospectuses that have an ESG component. The Public Statement has particular importance in providing useful insight into sustainability-related disclosures that will be included in the prospectuses and alleviating the absence of a legal framework pending the adoption of legislative proposals for the EU Listing Act and the Regulation on European Green Bonds. While the Public Statement is addressed to both equity and non-equity securities, this article focuses on sustainability-linked bonds.
Expected ESG Disclosures in Prospectuses: General Principles
The Public Statement underlines that following provisions of the Prospectus Regulation , ESMA expects that material sustainability-related disclosure is included in equity and non-equity prospectuses as well as final terms. Under Article 6 (1) of the Prospectus Regulation, “a prospectus should contain the necessary information which is material to an investor for making an informed assessment of a) the assets and liabilities, profits and losses, financial position, and prospects of the issuer and of any guarantor; b) the rights attaching to the securities; and c) the reasons for the issuance and its impact on the issuer”. Accordingly, ESMA refers to Recital 54 of the Prospectus Regulation, outlining 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”.
ESMA also recommends issuers take the following points into consideration while drafting sustainability-related matters in prospectuses:
- Basis for statements: To provide sufficient and objective information in order to enable investors to make an informed investment decision, issuers should provide a basis for any statements concerning their or the relevant security’s sustainability profile. Such basis could include referring to underlying data or research or analysis by third parties. Issuers should provide a balanced view by presenting both positive and the negative aspects.
- Sustainability-related disclaimers: ESMA considers sustainability disclosures should not be used to excuse the non-performance of factors over which the issuer exercises control. For example, a disclaimer stating that the proceeds of the offering may be invested contrary to the criteria for project selection set out in a prospectus concerns a factor over which an issuer exercises control and should not be included as a disclaimer.
- Comprehensive disclosure: Comprehensibility of any sustainability disclosure should comply with requirements set out in Article 37 (1) of the Commission Delegated Regulation 2019/980 (CDR 2019/980). In particular, the prospectus should clearly define the components of mathematical formulas and, where applicable, clearly describe the product structure. Any technical terminology relating to sustainability should also be adequately defined.
ESMA’s Expectations in relation to Sustainability-linked Bonds
ESMA expects prospectuses and final terms relating to non-equity securities advertised as considering a specific ESG component or pursuing ESG objectives, such as ‘use of proceeds’ bond and ‘sustainability-linked’ bonds (“SLB”), to include the disclosure required pursuant to Article 6(1) of the Prospectus Regulation and the relevant annexes to CDR 2019/980. For the purposes of the Public Statement, ESMA defines sustainability-linked bonds as bonds for which the financial and/or structural characteristics can vary depending on whether the issuer achieves predefined sustainability/ESG objectives.
ESMA expects SLB prospectuses to include information about the key performance indicators (KPIs) and associated sustainability targets. This disclosure should include, but not be limited to, risks concerning potential conflicts of interest when such KPIs are selected and monitored. Furthermore, the impact of the issuer’s overall firm-level sustainability performance on the security should be clear in the risk factors.
In terms of reasons for the offer to the public, issuers not intending to use the offer proceeds for a specified sustainability project but who issue SLBs for general corporate purposes should disclose the rationale for the issuance as well as its impact on the issuer in the prospectus.
For the information regarding securities to be offered to the public or admitted to trading, if interest payments are influenced by the fulfillment or failure to fulfill sustainability objectives, ESMA expects this to be disclosed in the prospectus. The means by which interest payments are calculated in such contexts should clearly be disclosed. This information should include references to the selected KPIs as well as sustainability performance targets. If advanced amortization may occur, issuers should disclose any impact that this may have on the sustainability performance of an investment.
For additional information, if SLB issuers indicate that any advice or assurances have been provided by advisors or third parties about the sustainability characteristics of the selected KPIs, the prospectus should contain disclosure concerning the scope of those assurances and by whom they were provided.
ESMA recommends that issuers disclose in their prospectus whether they intend to provide post-issuance information. This disclosure should include an indication of what information will be reported and where it can be obtained. For example, an issuer could include the URL to the website where investors will be able to access the post-issuance information.
ESMA’s Public Statement has particular importance given that it draws a framework prior to the disclosure requirements that could be proposed under EU Listing Act. ESMA’s framework reflects its efforts to ensure that NCAs take a coordinated approach to the scrutiny of sustainability-related disclosure in prospectuses and support investors’ ability to make an informed investment decision on sustainability-related disclosures included in equity and non-equity prospectuses.
- ESMA Strategy 2023-2028, https://www.esma.europa.eu/sites/default/files/library/esma_strategy_2023-2028.pdf (Accessed 03.09.2023).
- ESMA’s Public Statement on Sustainability Disclosure in Prospectuses, https://www.esma.europa.eu/sites/default/files/2023-07/ESMA32-1399193447-441_Statement_on_sustainability_disclosure_in_prospectuses.pdf, (Accessed 03.09.2023).
- Proposal for a regulation amending Regulations (EU) 2017/1129, (EU) No 596/2014 and (EU) No 600/2014 to make public capital markets in the Union more attractive for companies and to facilitate access to capital for small and medium-sized enterprises https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A52022PC0762, (Accessed 03.09.2023).
- Proposal for a Regulation of the European Parliament and of the Council on European Green Bonds, https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A52021PC0391 (Accessed 03.09.2023).
- Regulation (EU) 2017/1129 of the European Parliament and of the Council of 14 June 2017 on the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market, and repealing Directive 2003/71/ECText with EEA relevance, https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex%3A32017R1129 , (Accessed 03.09.2023).
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