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The impact of the European Commission’s climate disclosure rules on investment

Elena Philipova
Elena Philipova
Director of Sustainble Finance, Refinitiv
Delphine Dirat
Delphine Dirat
Senior Manager, Industry and Government Affairs Sustainable Finance, LSEG

The European Commission (EC) Technical Expert Group (TEG) on Sustainable Finance has made recommendations for the climate disclosure of climate-related information. It is hoped, the Commission says, that the climate disclosure rules will improve transparency in the industry, combat greenwashing and avoid any divergent law-making across EU member states.


  1. Climate disclosure rules have been extrapolated from the Commission’s non-binding guidelines on non-financial reporting that were published in 2017.
  2. A new reporting framework applies to large investors (those with more than 500 employees) from mid-2022.
  3. Some investors have warned that some exact terms used still lack clarity.

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The TEG’s final report on how climate-related disclosures could promote sustainable investment was first published in January 2019, with stakeholders invited to offer their comments before the end of February.

The guidelines were then modestly revised in the following months, before being adapted into a new sleight of climate reporting guidelines shortly later.

The new guidelines are, in effect, a small extension to the Commission’s non-binding guidelines on non-financial reporting that were published in 2017 – and are, at the very least, consistent with its requirements.

They also take in the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), the Michael Bloomberg-chaired organisation that produced its own industry-accepted guidelines in 2017.

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Adopting a materiality perspective

The Commission’s summary points out that the material within is intended to be “accompanying” with the existing non-financial reporting directive and the TCFD’s recommendations, and points out that they are not yet legally binding.

One of the core principles is to encourage companies to adopt a “double materiality perspective”, where they consider both the impact of climate on their operations (for a primary audience of investors) and the impact that the company has on climate (for a primary audience of consumers, employees and wider society, alongside investors).

It also calls for an appreciation of how the company’s impact on the climate can, in turn, be financially material – going slightly beyond the scope of the TCFD’s recommendations, which largely deal with the impact of climate on corporates. These must be disclosed in pre-contractual documents, and on the corporate website.

The package of recommendations oblige market participants to disclose how they integrate ESG factors into their investment and risk management processes along these lines.

There are implications for EU-based investment managers who run products along a number of lines – particularly those that already run consistently with existing EU directives. They will also apply to investment managers in the UK under a disclosure regime that is expected to be phased in from 2022.

The SFDR and the route to implementation

The Sustainable Finance Disclosure Regulation (SFDR) makes several transparency and disclosure requirements of investment managers, whether or not their funds or portfolios have an explicit ESG focus.

Managers must disclose how they have integrated sustainability into their decision-making and how its remuneration policies are consistent with that approach, and ensure their marketing does not undermine those requirements.

The reporting framework for disclosing “principle adverse impact (PAI)” came into play from 10 March 2021 on a “comply or explain” basis, but will move to “comply” from 30 June 2021 for large financial investors (those with more than 500 employees).

Any firm that claims its products are sustainable will also need to make a product level disclosure in accordance with the rest of the EU’s green taxonomy.

From there, the climate disclosure rules become applicable to market participants in waves.

By 30 June 2023, those same large participants must widen the scope to disclose further details to align with a choice of suggested data points, covering any investments made in the 2022 calendar year.

By 30 June 2024, this requirement will be extended to include historical, year-on-year comparisons.

Discover more about the SFDR solutions available from Refinitiv – available via Eikon and feed.

Wider requirements of the climate disclosure rules

Many of these changes will be required of wealth managers and other advisers, too, including publishing information (such as a policy statement) on their website highlighting how sustainability risk is integrated into their process, as well as publishing this information in any pre-contractual disclosures.

If advisers promote the ESG credentials of their service, they are expected to be able to pass on relevant disclosures from product providers.

In addition, the disclosures outlined in the new taxonomy guidelines – those covering sustainable products, those with ESG characteristics, and mandatory statements for those with no ESG characteristics – will need to be made in a company’s pre-contractual documents, websites and periodic reports from 1 January 2022.

Disclosures in relation to all six environmental objectives will need to be made from 1 January 2023.

For companies, there will be a burden of passing on this information to investors, particularly when it comes to providing indicators for environmental factors (to name a few: their use of energy, raw materials, water and land; production of waste; impact on biodiversity) and social objectives (for example: tackling inequality, boosting social integration, or relationships with a labour force).

Investment managers are expected also to be able to demonstrate that investee companies follow good governance practices.

Still a way to go before guidelines become law

Some market participants have warned that there is still a way to go before the Commission’s guidelines can be effectively written into law.

In May 2020, investors, politicians and campaigners pointed out that the guidelines lack a clear definition of the term “fossil fuels”, for example, which they argue could lead asset managers to understate the environmental risks of their portfolios.

At the time, Wolfgang Kuhn, director of financial sector strategies at responsible investment group ShareAction, said that the proposals were “like disclosing the amount of fat in a chocolate bar, but conveniently failing to mention the sugar content”.

Though the SFDR has given investors and corporates a large degree of clarity about the future of ESG-related disclosure, there are a few question marks that remain. But the hope is that once they are adopted by the second half of 2021, the market can truly harmonise – and start making green finance work to the benefit of all.

LSEG is committed to providing the financial market with data and solutions which help build towards a sustainable future. We see disclosure as an important step to investing in sustainable companies and assets, discover how Refinitiv can help you navigate the regulatory sustainable landscape as it continues to develop.