In supporting the ESG transition, ESMA published a public statement on ESG-related disclosure in prospectuses earlier this year, in which it underlines the relevant requirements. ESMA reiterates that a prospectus must contain the necessary information that is material to an investor in making an informed assessment. ESMA reminds issuers and their advisors to consider ESG-related matters when preparing prospectuses, to the extent that the effects of those matters are considered material. This also includes any non-financial information that the company is already required to report on in accordance with the Non-Financial Reporting Directive (NFRD) and, in the near future, the Corporate Sustainability Reporting Directive (CSRD). Whether the ESG-related information that companies report on under these directives should also be included in a prospectus still comes down to the question whether such information is material for an investor. ESMA points out that, even if the detailed annexes containing the prospectus content requirements do not mention ESG-related topics, the information should be included if it is considered material.
With respect to the substance of the disclosures, ESMA recommends that in disclosing ESG-related information, issuers should consider:
- including the basis for statements on their sustainability profile or that of the securities they issue, such as (i) specific market standards or labels; (ii) underlying data and assumptions; and (iii) research or analyses conducted by third parties;
- providing a balanced view, so that both positive and negative aspects are presented;
- not including sustainability-related disclaimers to excuse non-performance of factors over which the issuer exercises control; and
- providing clear definitions and formulas for sustainability-related terms.
Lastly, ESMA reminds issuers that where ESG-related information is included in the annual financial statements, management reports and non-financial statements, this information, to the extent material under the prospectus standard, should also be included in a prospectus. In that context, ESMA states that its recommendations set out in its common enforcement policies for annual financial reports should also be considered when ESG-related information is included in prospectuses.
Corporate Sustainability Reporting Directive
When it comes to ESG disclosure in equity prospectuses, the CSRD will also play an important role. Having entered into force earlier this year, the CSRD will cause a major shift in the field of ESG reporting, as it expands both the number of companies that will have to report on ESG and the topics on which such companies will have to report.
The CSRD will gradually become applicable, meaning that certain insurance and credit institutions as well as larger listed entities that currently already report under the NFRD will have to report under the CSRD from financial year 2024 onwards. The scope of the CSRD will be expanded to include other large undertakings and listed small and medium-sized undertakings for the financial years 2025 and 2026 respectively.
Under the CSRD, the European Commission has established European Sustainability Reporting Standards (ESRS), which contain extensive disclosure requirements. We have three observations regarding these disclosure requirements. First, the ESRS require companies to perform a materiality assessment to determine which topics and disclosure requirements are considered material to the company. If material, those requirements must be reported on by the company. Second, the disclosure requirements can be such that companies are expected to integrate ESG in their strategies and business models. For example, the cross-cutting disclosure requirement ESRS 2 SBM-3 requires all companies that fall within scope of the CSRD to disclose their material impacts, risks and opportunities and how these interact with their strategies and business models. Although companies can report that no such interaction exists, it stands to reason to assume that they are at the least required to think about ESG and how it interacts with their strategies and business models. Lastly, the ESRS simply require the company to report on the ESG-related matter, both in retrospect and by taking into account the short-term, medium-term and long-term horizons.
Given the extent of the disclosure requirements under the CSRD, an issuer seeking to list its securities will be best advised to assess the full impact of the CSRD as part of the listing process even though the CSRD may only be applicable to it in one or two years' time. In doing so, an issuer (i) should assess which subjects covered in the ESRS are material to it; (ii) is advised to have integrated ESG in its strategy and business model; and (iii) should be prepared to report on ESG-related matters. This results in substantially more ESG-related information being available, which will eventually feed ESG disclosure in equity prospectuses.
Market and legal expectations
However, it is not only the CSRD that is driving more beefed-up ESG disclosures. Investors are increasingly considering ESG-related matters in their investment decisions, driven in part by demands from their beneficiaries and in part by EU rules for ESG disclosure by the investment management sector (such as the Sustainable Finance Disclosure Regulation). In addition, the upcoming EU Listing Act proposals are expected to include rules on ESG disclosure in prospectuses. As a result, ESG-related information is expected to increasingly reach the materiality threshold and, in line with the current ESMA guidance, will therefore have to be included in equity prospectuses. This includes integration of ESG elements in the equity story, since investors want to see ESG integrated in the strategy and processes of companies they invest in.
In short, although no specific legislation is available yet, current ESMA guidance and (future) disclosure obligations under the CSRD provide a good starting point when it comes to ESG disclosure in equity prospectuses. In assessing whether ESG-related information should be included in equity prospectuses, it once again comes down to the question if the information qualifies as material information for investors. As more information will become available and investors are increasingly considering ESG-related information in their investment decisions, issuers will more frequently include substantial ESG-related information in their equity prospectuses, thereby also paving the way for upfront ESG disclosure.