ESMA CP on amendments to EU Prospectus regime – ESG proposals

Background

The EU Listing Act, which makes changes to the EU Prospectus Regulation (“EU PR”), is due to be published in the Official Journal of the EU in Q4 2024, and will enter into force 20 days later. However, many amendments to the EU PR will be phased in since they are reliant on delegated acts; in particular, certain key changes to required ESG disclosures are not expected to apply until the summer of 2026. 

ESMA Consultation Paper on EU PR 

In response to its mandate from the Commission, on 28 October 2024 ESMA published a consultation paper on draft technical advice concerning the EU PR (the “CP”).  The CP  includes proposed changes to Commission Delegated Regulation (EU) 2019/980 (the “CDR”) setting out format amendments and updated disclosure annexes,  including a new disclosure annex, Annex 21, (the “ESG Disclosure Annex”) for debt securities advertised as considering ESG factors or pursuing ESG objectives (“ESG Bonds”). 

These proposals are of relevance to all ESG Bonds subject to the EU PR, including those aligned with voluntary market-based standards (such as the ICMA Principles); green bonds meeting the requirements of the EU’s official label (“EuGB”) and ESG Bonds using the voluntary templates under the European Green Bond Regulation (“EuGB Regulation”) (for an overview of the EuGB Regulation see our blog post and our podcast series).

Rationale for specific ESG disclosures

The aim of the new ESG Disclosure Annex is to prevent greenwashing and ensure investors receive the necessary ESG information to allow them to make an informed investment decision. However, ESMA is tasked with ensuring that such new disclosure requirements strike the right balance and are not unduly burdensome. The ESG Disclosure Annex should avoid overlaps and inconsistencies with the requirements of other EU sustainable finance legislation. 

What is ESMA proposing for ESG Bonds?

ESG Disclosure Annex

The draft ESG Disclosure Annex is intended to be used as a building block in combination with other disclosure annexes applicable to non-equity securities. ESMA emphasises that its starting point was the July 2023 Public Statement on sustainability disclosures expected to be included in prospectuses drawn up in compliance with the EU PR (the “Statement”) but acknowledges there are aspects which go further (for more on the Statement, see our blog post here).

Specific disclosure requirements for Use of Proceeds bonds and SLBs

In its Statement, ESMA’s disclosure expectations were mapped to the existing disclosure requirements under the disclosure annexes of the EU PR. The new ESG Disclosure Annex follows the same approach for product specific disclosures; indeed, the use of proceeds (“UoP”) bond and sustainability-linked bond (“SLB”) disclosures track the items set out in the Statement applicable to such product types. ESMA has also taken its inspiration from the terms used in the Statement for its proposal to introduce new definitions of SLBs and UoP bonds into the CDR.

Requirements for ESG Bonds going beyond ESMA’s Statement

Disclosure item regarding alignment with market standards, labels or taxonomies 

• ESMA is concerned that some issuers are including statements in prospectuses referencing ‘partial’ alignment with specific standards or legislative frameworks such as the EU Taxonomy Regulation, which introduces greenwashing risks owing to the potential for such statements to mislead investors as to the extent of the product’s alignment and (where alignment with relevant criteria are attained) the significance of such alignment to the ESG features of the non-equity security or its ESG objectives.
• Where an ESG Bond is advertised as complying or aligned with, eligible under or otherwise adhering to a specific market standard, label or taxonomy, ESMA is proposing that the prospectus unequivocally state (i) how the relevant criteria are met and (ii) that they are significant in relation to the ESG features or objectives of the non-equity securities. This goes beyond the Statement, which provided that issuers can indicate whether they adhere to a specific market standard, label or taxonomy. 
• Where issuers cannot make such statements, they will still be required to provide information to help investors understand the ESG factors taken into account and/or the ESG objectives pursued by the securities.

Requirement to disclose if the issuer intends to provide post-issuance information

ESMA is also proposing to introduce a requirement to disclose if the issuer intends to provide post-issuance information and if so where it can be found. This was expressed only as a recommendation under the Statement, as ESMA did not have the legal basis to introduce a new requirement under the current EU PR. The Listing Act provides such legal basis.

Whilst these proposals are still subject to consultation (and therefore may change), we have already seen that certain competent authorities have been focussing on the nature of issuer claims regarding ‘alignment’ or ‘partial’ alignment with standards or legislation and transparency around post-issuance information as part of their scrutiny under the existing EU PR.

Disclosure of ESG Ratings

The ESG Disclosure Annex requires disclosure of ESG ratings, assigned to the issuer or the securities at the request of or with the cooperation of the issuer in the rating process. To date there has been reluctance from market participants to include disclosure of ESG ratings in prospectuses given concerns around the integrity, transparency and quality of ESG ratings. The EU ESG Ratings Regulation, expected to be published in the Official Journal of the EU in Q4 2024, will mitigate some of these concerns.

EuGB Regulation and proposed EU PR amendments

ESMA has confirmed that the ESG Disclosure Annex will apply to all EU PR-compliant ESG Bonds, including EuGB labelled bonds and ESG Bonds using the voluntary templates under the EuGB Regulation.

ESMA has considered the interaction between the disclosure requirements under the EuGB Regulation and the ESG Disclosure Annex and has sought to avoid any overlap between the pre-issuance disclosure under the EuGB Regulation and future prospectus disclosure requirements.

ESMA is therefore proposing that pre-issuance disclosures under the EuGB Regulation included in a prospectus can be used to satisfy disclosure requirements of the proposed ESG Disclosure Annex. This includes the relevant information from the EuGB factsheet or the voluntary pre-issuance disclosures under the EuGB Regulation. To facilitate this, ESMA proposes that issuers will be permitted to incorporate (parts of) these documents into the prospectus by reference.  

Facilitating EuGB issuances under base prospectuses 

To further support the adoption of the EuGB Regulation, ESMA proposes to classify the information in factsheets as ‘Category C’ information, which may be incorporated by reference into final terms. This could avoid the need for an update to a base prospectus or for an issuer to produce a supplement to include such disclosures.

ESMA states it is typically not in favour of permitting incorporation by reference through final terms but acknowledges the specific use case in the context of the EUGB Regulation. 

Voluntary Entity-level ESG disclosure

For non-equity securities, a new optional disclosure item has been included in the standard non-equity securities registration document for issuers required to provide sustainability reporting under the Accounting Directive or Transparency Directive (i.e. those in scope of the Corporate Sustainability Reporting Directive). This will permit those issuers to include a hyperlink in a prospectus to their entity level sustainability information, provided that the prospectus includes a disclaimer that such information does not form part of the prospectus itself unless expressly incorporated by reference. 

Interaction with other EU ESG legislation

Due to the current plans to revise the Sustainable Finance Disclosure Regulation (“SFDR”) and ESMA’s current Common Supervisory Action on MiFID II sustainability topics, ESMA notes that it does not deem it appropriate at this time to align disclosures under the EU PR with the SFDR nor provide any advice on consistency or alignment between ESG disclosures for non-equity securities and sustainability preferences.

Timings

The deadline for response is 31 December 2024. ESMA expects to deliver a final version of its technical advice to the Commission in the second quarter of 2025 with the required ESG disclosures not expected to apply until the summer of 2026. 

This means that there is a mismatch in timing between the EuGB Regulation, which applies from 21 December 2024, and the related elements of the EU Listing Act and its delegated acts being finalised and applying. We understand that the Commission is expected to publish Q&A on the EuGB Regulation (including on its interactions with the EU PR as amended by the EU Listing Act), although no commitment has been made with respect to timing. There are therefore still many pieces which need to fall into place before we can see how the EU regulatory landscape will shape up for ESG Bonds.