Introduction
The European Securities Markets Authority (“ESMA”) recently issued a statement aiming (ESMA32-1399193447-441) to promote coordinated action by the EU national competent authorities (“NCAs”) with regard to sustainability disclosure in securities prospectuses which are subject to requirements of Regulation (EU) 2017/1129 (“Prospectus Regulation”). These recommendations should also be considered by issuers and their advisers when drawing up prospectuses. Notably, ESMA recognizes that several legislative proposals affecting ESG disclosure – such as EU Listing Act or EU Green Bond Regulation – are in the pipeline but will take time to enter into effect.
While relevant NCAs such as the German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, BaFin) or the Luxembourg Commission de Surveillance du Secteur Financier (CSSF) already apply these requirements for new prospectus approval procedures, most NCAs do not expect issuers to supplement base prospectuses with these new requirements before the next programme update.
Status quo before ESMA’s statement
As a general rule, a securities prospectus shall contain all necessary information which is material to investors for making an informed investment decision in the relevant securities. While sustainability-related disclosure in prospectuses is already mentioned in Recital 54 Prospectus Regulation (“[…] 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”), the relevant delegated acts setting out annexes with issuer and securities specific disclosure requirements do not specify any explicit requirements as to sustainability disclosure. Nevertheless, NCAs required issuers, for instance, to set out relevant ESG aspects in the risk disclosure, reference links to issuer’s ESG frameworks (without incorporation by reference) or details on the calculation of relevant KPIs (in case of sustainability-linked bonds). Demands of NCAs across EU jurisdictions pertaining to these specific requirements were to a certain extent fragmented in the past, hence ESMA’s initiative to promote coordinated action.
ESMA’s recommendations
ESMA’s recommendations split into general and security-specific statements.
Basis for ESG related statements
ESMA expects that issuers set out the basis for statements concerning the sustainability profile, for instance (i) by stating that the issuer or securities adhere to a specific market standard or label and including the material information about that standard or label in the prospectus, (ii) referring to the underlying data and assumptions and/or (iii) by referring to any research or analysis by third parties.
It is already common practice to refer to the underlying market standard or label (e.g. ICMA Green or Social Bond Principles) in the prospectus or in the respective Final Terms, if any, and provide an additional reference to the issuer’s website where additional information, in particular the respective ESG framework can be found, which includes underlying data, research and assumptions.
Sustainability-related disclaimers
ESMA considers that sustainability-related disclaimers should not be used to excuse non-performance of factors over which the issuer exercises control. In particular, a disclaimer stating that the proceeds of the offering may be invested contrary to the criteria for project selection concerns a factor over which an issuer exercises control and should not be included as a disclaimer. While this requirement is in line with current market practice, it clearly aims to limit a continued trend to extent ESG related disclaimers.
Accurate and comprehensive disclosure
ESMA also underlines the importance that the prospectus provides comprehensive ESG disclosure. Therefore, it is expected that a prospectus should clearly define the components of mathematical formulas and, where applicable, describe the product structure. Any technical terminology relating to sustainability should also be adequately defined.
In case of sustainability-linked bonds, ESMA expects information about the selected key performance indicators (KPIs), the sustainability performance targets (SPTs) and information enabling investors to assess the consistency of the KPIs and its associated SPTs with the relevant sector-specific science-based targets (if any) and the issuer’s sustainability strategy. 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 SPTs.
Risk Factors
As a general rule, prospectuses must disclose risks that are material and specific to the issuer and the securities. Under this general requirement, certain market standard risk factors for ESG use of proceed and sustainability-linked bonds evolved, but application across jurisdictions was not entirely consistent.
Generally, ESMA points out that issuers can continue to set out in a risk factor, if relevant, that issuer’s sustainability expectations may differ from those of an investor or that the notion of sustainability may change according to scientific progress, relevant legislation and/or investor preferences.
For use of proceeds bonds, ESMA requires disclosure of risks regarding (i) the allocation and management of proceeds as well as (ii) risks concerning the viability and achievement of the sustainable project.
For sustainability-linked bonds, ESMA requires that risks regarding key performance indicators (KPIs) and associated sustainability targets should be disclosed. This disclosure should include, but not be limited to, risks concerning potential conflicts of interest when such KPIs are selected and monitored. In addition, the impact of the issuer’s overall firm-level sustainability performance on the security should be clear in the risk factors.
Reasons for the offer and use of proceeds
ESMA requires for use of proceeds bonds that issuers describe the goal and characteristics of the relevant sustainable project and how the sustainable goal is expected to be achieved as well as any permissible terms and conditions for deviations to the minimum use of proceeds and the sustainable project.
For use of proceeds bonds and whenever a sustainable project is not identified at the time of the (base) prospectus approval, issuers should disclose the criteria which will be used to determine how the proceeds are allocated for sustainable purposes. As of today, these aspects are usually not included in prospectuses but only in the respective ESG frameworks. ESMA expressly suggests that prospectuses could include a summary of the material information from their ESG framework or reference the legislation that will be used to determine the sustainability profile of the projects (if any).
In case of sustainability-linked bonds, the proceeds of which are not used for a specified sustainability project but for general corporate purposes (which is usually the case), the prospectus should disclose the rationale for the issuance as well as its impact on the issuer.
Information concerning the securities
If advanced amortisation may occur, issuers should disclose any impact which this may have on the sustainability performance of an investment.
In addition, ESMA requires disclosure about the scope of any third-party advice or assurances about the sustainability characteristics of the selected KPIs and by whom they were provided.
Final Remarks
With its recommendations, ESMA provides specific guidance for the inclusion of ESG disclosure in prospectuses. While these requirements are in many aspects in line with current market practice, issuers should check whether ESMA’s requirements and recommendations go beyond their current sustainability disclosure and amend accordingly. With a view to such amendments, it can reasonably be expected that NCAs will challenge issuers and their advisers in future prospectus approval procedures to include (partial) summaries the relevant ESG framework directly in the prospectus instead of simple references to further information and documents provided on the issuer’s website.
