On 11 July 2023, the European Securities and Markets Authority (ESMA) published a public statement on sustainability disclosure in prospectuses, available here: ESMA32-1399193447-441 Statement on sustainability disclosure in prospectuses (europa.eu).
The statement is addressed to the National Competent Authorities (NCAs) to promote coordinated action regarding sustainability-related disclosure included in prospectuses under current legislation. While the statement is addressed to NCAs, ESMA have said that its contents should be taken into account by issuers and advisers when drawing up a Prospectus Regulation (PR) compliant prospectus that contains sustainability-related disclosure.
Whilst there is little in the way of deviation from best practice here, the statement reflects the enhanced focus of ESMA and NCAs on ESG disclosure and is likely to result in additional commentary from NCAs during the prospectus approval process.
A summary of some of the key takeaways is included below.
- ESG Disclosure in Prospectuses
- As you would expect, ESMA reminds issuers and their advisers of their general disclosure obligations under Article 6(1) of the PR to include “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 any guarantor; (b) the rights attaching to the securities; and (c) the reasons for the issuance and its impact on the issuer (emphasis added by ESMA).”
- ESMA also highlights that sustainability-related disclosures in prospectuses are mentioned in Recital 54 PR, which states 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”.
- Whilst ESMA states that the “circumstances of the issuer and the type of securities in question are critical to determining which information will be material” they do not otherwise provide guidance as to materiality. This is welcome, as it leaves the determination to the issuer and its advisers as is current practice (absent, of course, any commentary that might be received from NCAs in the context of a prospectus review).
- Backing up sustainability claims – The statement goes on to say that issuers should provide the basis for any statements concerning their sustainability profile or that of the securities they issue. For example, (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 underlying data and assumptions and/or (iii) by referring to any research or analysis by third parties. ESMA also states that it is important to emphasise that objectivity implies providing a balanced view, so positive and negative aspects of the sustainability profile of the issuer and the securities should be presented.
- Risk factors should not be used as a disclaimer where an issuer has control – While an issuer might state in a risk factor that its sustainability expectations may differ from those of an investor or that the notion of sustainability may change according to scientific progress, relevant legislation or investor preferences, ESMA considers that sustainability-related disclaimers should not be used to excuse non-performance of factors over which the issuer exercises control. For example, disclaimers that state that the proceeds of the offering may be invested contrary to the criteria for project selection set out in a prospectus should not be included in the prospectus as project selection is a factor over which an issuer exercises control – we expect these types of disclosures to be scrutinised by NCAs and require discussion with issuers in future prospectus reviews.
- Comprehensibility – The comprehensibility of any sustainability disclosure should be ensured by complying with the requirements set out in Article 37(1) of CDR 2019/980 (by way of reminder, these are the criteria that NCAs use to scrutinise the comprehensibility of information contained in a prospectus). 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. As sustainability disclosure, particularly in relation to SLBs, increasingly features technical terminology (e.g. GHG emissions, GHG intensity) Issuers and advisers should ensure that those terms are adequately and clearly explained.
- Additional disclosure requirements under the PR Annexes – Note, that the statement also includes expected disclosure in relation to particular items under the PR Annexes. By way of example, in relation to sustainability-linked bonds (SLBs), issuers not intending to use the proceeds for general corporate purposes should disclose “the rationale for the issuance as well as its impact on the issuer in the prospectus”. In relation to use of proceeds bonds, issuers should “describe the goal and characteristics of the relevant sustainable project and how the sustainable goal is expected to be achieved”.
- Prospectuses relating to non-equity securities with a specific ESG component or objective
- As you would expect, ESMA requires prospectuses and final terms relating to non-equity securities advertised as taking into account a specific ESG component or pursuing ESG objectives, such as use of proceeds bonds and sustainability-linked bonds, to include the disclosure required pursuant to Article 6(1) PR and the PR annexes.
- Use of Proceeds Bonds: ESMA expects disclosure about the use and the management of the proceeds and information enabling investors to assess the sustainability ambition underpinning the process for project evaluation and selection. For example, prospectuses could include a summary of the material information from their ‘green bond framework’.
- SLBs: ESMA expects information about the selected key performance indicator(s), the sustainability performance target(s) 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.
- 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.
- Note, ESMA do not state whether they consider including a link to a framework that is not incorporated by reference as sufficient disclosure (as has been common practice for some issuers for many years) although the fact that ESMA expects “disclosure about the use and the management of the proceeds and information enabling investors to assess the sustainability ambition underpinning the process for project evaluation and selection” would suggest that such an approach may not be deemed sufficient in the future.
- Equity Prospectuses and sustainability information
- Sustainability related disclosures published under Non-Financial Reporting Directive and the proposed Corporate Sustainability Reporting Directive should be included in equity prospectuses. It is helpful that this has not been extended to debt prospectuses, leaving it up to a materiality determination of the issuer and its advisers.
- Consistency with Advertisements
- It is clear from the statement that ESMA is increasingly focussed on what it sees as a potential gap between the contents of prospectuses and marketing materials. ESMA and NCAs have observed that some issuers include sustainability-related disclosure in their advertisements that is not included in their prospectuses and have stated that, if disclosure is material under Article 6(1) PR, it should first be included in the relevant prospectus, if necessary via a supplement to the prospectus.
- Interestingly, ESMA states that it views the importance of sustainability-related disclosure in an advertisement to investors as an indicator of its materiality. ESMA’s statement means that additional care will need to be exercised when making the determination in relation to materiality and consistency of sustainability-related disclosures in marketing materials with the Prospectus.