Sustainable finance disclosure still falling short

Financial firms still aren’t doing a great job of disclosing the most serious negative environmental impacts of investment products, and generally aren’t reporting on their alignment with the Paris Agreement, according to a new report from European regulators.

The Joint Committee of European Supervisory Authorities — an umbrella group that includes the European Banking Authority (EBA), the European Insurance and Occupational Pensions Authority (EIOPA) and the European Securities and Markets Authority (ESMA) — issued a report detailing the results of their latest review of voluntary disclosure under the rules, known as the Sustainable Finance Disclosure Regulation (SFDR).

Specifically, the regulators examined both firm-level, and product-level, disclosures of the most significant negative impacts of investments on both the environment and people.

Under the sustainable finance disclosure rules, firms are required to report when they consider “principal adverse impacts” of investment decisions on sustainability, and to provide insight on their approach to these effects.

“When a financial market participant considers principal adverse impacts, it means that it should seek to reduce the negative impact of the companies they invest in,” the report noted.

Yet, the regulators found significant variation in firms compliance with the requirements, and in the quality of the disclosures that firms are providing.

While they noted that these kinds of disclosures have become easier to find on firms’ websites, the regulators said firms should be doing a better job of explaining the reasons for not disclosing the major negative environmental impacts.

Additionally, the regulators found that financial market participants are generally not disclosing to what extent their investments align with the Paris Agreement climate change treaty.

“While the overall level of disclosure is low, disclosures are made in vague term and entities mention their degree of alignment to Paris Agreement without referencing the indicators for the decarbonisation path of their investments,” the report said.

In response to their review, the regulators recommended that local authorities follow-up with non-compliant firms and consider whether enforcement action is warranted.

They also called for them to help firms comply with the requirements, to improve industry awareness, and exchange best practices in this area.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.