On July 11, 2023, the European Securities and Markets Authority (ESMA) has published a public statement on sustainability disclosure in prospectuses, which is available here: ESMA32-1399193447-441 Statement on sustainability disclosure in prospectuses (europa.eu).
The declaration is addressed to the national competent authorities (NBAs) to promote coordinated action on sustainability-related disclosure in prospectuses under current law. Although the statement is addressed to NCAs, ESMA has said that issuers and advisers should take its contents into account when drafting a prospectus regulation (PR) in accordance with the prospectus containing information on sustainability.
While there is little deviation from best practice here, the statement reflects ESMA’s and NCAs’ increased focus on ESG information and will likely result in additional commentary from NCAs during the prospectus approval process.
Below you will find a summary of some of the most important conclusions.
Key learning points
- ESG information 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 that is material to an investor to make an informed assessment of: (a) the assets and liabilities, profits and losses, financial position and prospects of the issuer and any guarantors; (b) the rights attached to the securities; and (c) the reasons for the issuance and its impact on the issuer (emphasis added by ESMA).”
- ESMA also emphasizes that sustainability-related disclosures in prospectuses are mentioned in recital 54 PR, which states that “[…] environmental, social and governance conditions may also pose specific and material risks to the issuer and its securities and should be disclosed in that case”.
- While ESMA states that the “The circumstances of the issuer and the type of securities involved are critical in determining what information will be materialThey provide no further guidance regarding materiality. This is welcome as it leaves the determination to the issuer and its advisors, as is now common practice (without, of course, any commentary that might be received from NCAs in the context of a prospectus review).
- Substantiate sustainability claims – The statement continues that issuers must provide the basis for statements about their sustainability profile or that of the securities they issue. For example (i) by stating that the issuer or the securities adhere to a specific market standard or label and including material information about that standard or label in the prospectus, (ii) by referring to underlying data and assumptions and/or (iii) refer to research or analysis by third parties. ESMA also states that it is important to emphasize that objectivity means providing a balanced view. Therefore, positive and negative aspects of the issuer’s sustainability profile and impacts should be presented.
- Risk factors should not be used as a disclaimer when an issuer has control – Although an issuer may indicate in a risk factor that its sustainability expectations may differ from those of an investor or that the concept of sustainability may change depending on scientific progress, relevant legislation or investor preferences, ESMA is of the opinion that sustainability-related disclaimers should not may be used as an excuse for non-performance of factors within the issuer’s control. For example, disclaimers stating that the proceeds from the offering may be invested contrary to the project selection criteria 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 are types of disclosures that should be examined by NCAs and discussed with issuers in future prospectus reviews.
- Comprehensibility – The comprehensibility of any sustainability information must be ensured by complying with the requirements of Article 37(1) of CDR 2019/980 (as a reminder, these are the criteria used by NCAs to determine the comprehensibility of information 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 related to sustainability must also be adequately defined. Because sustainability disclosures, especially in relation to SLBs, increasingly include technical terminology (e.g., GHG emissions, GHG intensity), issuers and advisors should ensure that these terms are adequately and clearly explained.
- Additional Disclosure Requirements under the PR attachments – Please note that the statement also contains expected disclosure regarding certain items under the PR attachments. By way of example: with regard to sustainability-linked bonds (SLBs), issuers that do not intend to use the proceeds for general corporate purposes must disclose “the reason for the issue and its impact on the issuing institution in the prospectus”. With regard to the use of yield bonds, issuers must “describe the purpose 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 that prospectuses and final terms relating to non-equity securities advertised as taking into account a specific ESG component or pursuing ESG objectives, such as yield bonds and sustainability bonds, require disclosure required by Article 6(1) PR and the PR Annexes.
- Use of yield bonds: ESMA expects disclosure on the use and management of proceeds and information that enables investors to assess the sustainability ambition underlying the project evaluation and selection process. For example, prospectuses may contain a summary of material information from their ‘green bond framework’.
- SLBs: ESMA expects information on the selected key performance indicator(s), the sustainability performance objectives and information that enables investors to assess the consistency of the KPIs and associated DPDs with the relevant sector-specific science-based objectives (if applicable) and the sustainability strategy of the issuer.
- ESMA recommends that issuers disclose in their prospectus whether they intend to provide post-issue information. This disclosure should include an indication of what information will be reported and where it can be obtained.
- Please note: ESMA does not indicate whether it considers the inclusion of a link to a framework that is not incorporated by reference to be sufficient disclosure (as has been common practice for some issuers for many years), although the fact that ESMA expects “disclosure on the use and management of proceeds and information that enables investors to assess the sustainability ambition underlying the project evaluation and selection processwould suggest that such an approach may not be considered sufficient in the future.
- Share prospectuses and sustainability information
- Sustainability-related disclosures published under the Non-Financial Reporting Directive and the proposed Sustainability Reporting Directive should be included in share prospectuses. Helpfully, this has not been extended to debt prospectuses, but leaves this to the materiality determination of the issuer and its advisors.
- Ad consistency
- It is clear from the statement that ESMA is increasingly focusing on what it sees as a potential gap between the content of prospectuses and marketing materials. ESMA and NCAs have noted that some issuers include sustainability-related disclosures in their advertisements that are not included in their prospectuses and have stated that, if disclosure under Article 6(1) PR is material, it should first be included in the relevant prospectus must be included. if necessary, via a supplement to the prospectus.
- Interestingly, ESMA states that it considers the importance of sustainability-related disclosure in an advertisement to investors as an indicator of its materiality. ESMA’s statement means that extra care must be taken in determining the materiality and consistency of sustainability-related disclosures in marketing materials with the Prospectus.