Introduction

ESMA has issued a statement on sustainability disclosure in prospectuses that are drawn up under the EU Prospectus Regulation (EU PR): ESMA32-1399193447-441 Statement on sustainability disclosure in prospectuses (europa.eu)

Although the statement is addressed to EU National Competent Authorities (NCAs), ESMA makes it clear that issuers and advisors should take note of its contents when drawing up prospectuses including sustainability-related disclosure. 

Practical consideration: There has been some discussion amongst market participants as to whether the ESMA statement requires base prospectuses to be supplemented. The statement, though, is primarily relevant for any new prospectus approvals. It will depend on the base prospectus in question as to whether the information required can be added into final terms for the particular issuance. Most base prospectuses in relation to debt issuance programmes provide some flexibility in this regard.

It is interesting that ESMA has issued this statement now notwithstanding that there are other proposed legislative measures relating to sustainability-related disclosure in the pipeline. ESMA notes the proposals under the EU Listing Act¹ and the Regulation on green bonds (EuGB Regulation)² but states that it is issuing this statement in order to promote coordinated action by NCAs regarding the sustainability-related disclosure that should be included in prospectuses under the current rules.   In any event, the earliest that the EU Listing Act might apply is sometime in 2025 (taking into account that the European Parliament and Council of the EU need to vote on the proposal) and the earliest that the provisions of the EuGB Regulation might apply is the end of 2024 (assuming that the European Parliament and Council of the EU approve the version agreed in the trilogue procedure in the coming months)³. The statement therefore sets out ESMA’s view of how current EU legislation applies to the disclosure of sustainable bonds and is expressed to be without prejudice to the disclosures that may be drawn up under the future Listing Act. 

What type of sustainability-related disclosure does ESMA expect in prospectuses?

ESMA expects that when issuers are considering what sustainability-related disclosure to include in prospectuses and final terms, they should ensure that they adhere to Article 6(1) of the EU PR which requires a prospectus to contain the necessary information which is material to an investor to make an informed decision. The extent to which any sustainability-related disclosure is material will depend on the circumstances of the issuer and particular type of securities.

What should issuers consider when preparing sustainability-related disclosure?

ESMA recommends that issuers should take into account the following points when preparing sustainability-related disclosure in prospectuses.

1. Basis for any sustainability-related statements:  issuers should provide a basis for any statements concerning their sustainability profile or that of their securities in order to ensure that any statements are as objective as possible, with both positive and negative aspects both presented such as:

• by stating that the issuer or securities adhere to a specific market standard or label, with information about that standard or label in the prospectus;
• referring to underlying data and assumptions; and/or
• referring to any research or analysis by third parties.

Practical consideration: In respect of use of proceeds bonds for the issuance of green or social bonds, it is already common to refer to the adherence to the ICMA Green or Social Bond Principles, either in the base prospectus or the final terms.  Typically, reference is made to the website of the issuer which has further information on the Green/Social Bond framework and the applicable standard.

2. Sustainability-related disclosures: Issuers should not use sustainability-related disclaimers in their risk factors to excuse non-performance of factors over which the issuer exercises control.  For example, a disclaimer stating that the proceeds may be invested contrary to the criteria for the relevant project in the prospectus is a factor over which the issuer exercises control, notwithstanding any risk factors that might state that sustainability expectations may differ or the notion of sustainability may change according to scientific progress, relevant legislation and/or investor preferences.

Practical consideration: Over time, ESG risk factors in base prospectuses in relation to green/social bonds have become more extensive. Although this is understandable given the increased sensitivity for taking ESG liability risks into account,  risk factors should not exclude any responsibility on the part of the issuer for the use of proceeds. The ESMA statement is therefore in accordance with the existing market practice as regards risk factors.

3. Adequate disclosure: issuers should ensure that the prospectus clearly defines; (i) the components of any mathematical formulae (and where applicable the product structure); and (ii) any technical terminology relating to sustainability.

Sustainability-related disclosure in equity prospectuses and consistency with non-financial reporting

Any material sustainability-related disclosure published in an issuer’s non-financial reporting in accordance with the Non-Financial Reporting Directive (NFRD) and future sustainability reporting under the Corporate Sustainability Reporting Directive (CSRD) should be included in equity prospectuses.  For more information on the CSRD, please see our client alert here.

ESMA also refers to the 2021 and 2022 European Common Enforcement Priorities concerning issuers’ annual financial reports, that contain recommendations regarding the disclosures that should be included in issuers’ annual financial statements, management reports and non-financial statements and states that issuers should also take these recommendations into account when including information from their non-financial reporting in a prospectus given the importance of the consistency in the information provided to investors.

ESMA’s expectations for debt securities relating to a specific ESG component or objective

ESMA expects that debt securities that are advertised as taking into account a specific ESG component or pursuing ESG objectives, such as use of proceeds bonds or sustainability-linked bonds should include disclosure as required by Article 6(1) of the EU PR and the relevant annexes to the EU PR Delegated Act.⁴ The precise disclosure will depend on the characteristics of the particular securities so issuers are encouraged to reach out to ESMA and their NCAs if there are uncertainties about the required disclosure.

In addition, issuers should include disclosure about whether the issuer intends to provide post-issuance information and if so what information will be reported and where it can be obtained, such as by including the URL to the website where investor can access post-issuance information.

Practical consideration: This is already common practice. Under key recommendations in the ICMA Green Bond Principles, the green bond framework should be made available in a readily accessible format to investors. In addition, issuers should make any external reviews publicly available on their website.

To assist issuers and their advisers as well as NCAs in determining which information should be included in a prospectus, ESMA has included a table which sets out the disclosure that ESMA would expect in relation to these particular types of prospectuses. The table specifies the relevant Annex of the EU PR Delegated Act and EU PR article that provides the legal basis for requiring this information.

What disclosure does ESMA expect in relation to use of proceeds bonds?

ESMA expects that use of proceeds bond prospectuses should contain disclosure about the use and management of the proceeds and information enabling investors to assess the sustainability ambition underpinning the process for project evaluation. For example, prospectuses could include a summary of the material information from their green bond framework or reference the legislation used to determine the sustainability profile of the projects (if any).

In addition, issuers should include:

• Risks factors that are material and specific to the security, risks regarding allocation and management of proceeds and viability and achievement of the sustainable project.

• Description of goal and characteristics of sustainable project and how it is to be achieved together with any terms and conditions for deviations to the minimum use of proceeds and the sustainable project.  If the project is not identified at the time of the prospectus approval, issuers should disclose the criteria which will be used to determine how the proceeds are allocated for sustainable purposes.
• If advanced amortisation may occur, disclosure of the impact this may have on the sustainability performance of an investment.
• Disclosure of the scope and identity of any third party advice or assurances and by whom they were provided.

Practical consideration: To date, base prospectuses and final terms have been rather light on this aspect, instead primarily referring to websites where further information is available. In light of the above, it is therefore worth considering whether further information should be included in prospectuses and/or final terms. However,  ESMA only suggests that a summary of the green bond framework “could” be included:  it is, therefore, not mandatory and merely proposed as an example of how disclosure about the use and management of proceeds could be made. This is consistent with the approach under the EuGB Regulation, which does not provide for the mandatory inclusion of the factsheet in the prospectus.

Additional disclosure for use of proceeds bonds secured by cashflows or Asset-backed Securities (ABS):

In addition, ESMA expects that use of proceeds bonds backed by cashflows or ABS should include additional disclosure relating to:

• the criteria used to purchase the underlying assets which are considered to be sustainable and where any of the assets do not meet the criteria, that fact should be included in the prospectuses
• post-issuance reporting: if post-issuance information is to be provided, information should be included on what information will be reported and where this can be obtained.

What disclosure does ESMA expect in relation to Sustainability-linked Bonds?

Sustainability-linked bond (SLB) prospectuses should include information about the key performance indicators (KPIs), the sustainability performance targets (SPTs) and information enabling investors to assess the consistency of KPIs and associated SPTs with the relevant sector-specific science-based targets (if any) and the issuer’s sustainability strategy.

In addition, issuers of SLBs should include the following in prospectuses:

• disclosure of risks regarding KPIs and SPTs, including potential conflicts of interest when the KPIs are selected and monitored; also the impact of the issuer’s overall firm-level sustainability performance on the security should be clear in the risk factors.
• the rationale for the issuance and its impact on the issuer where the issuer is issuing the SLBs for general corporate purposes not a specific sustainability project.
• disclosure on interest payments that are influenced by the fulfilment or failure to fulfil sustainability objectives should be included in the prospectus, including the means by which such interest payments are calculated, including references to the KPIs and SPTs.
• disclosure of the impact of advanced amortisation (if relevant) may have on the sustainability performance of an investment.
• disclosure about the scope of any third party advice or assurances about the sustainability characteristics of the selected KPIs and by whom they were provided.

Consistency of sustainability-related disclosure and advertisements

ESMA and the NCAs have noticed that some issuers include sustainability-related disclosure in advertisements that is not included in the prospectus. If such disclosure is material, it should be included in the prospectus, such as via a supplement to the prospectus.  ESMA notes that the importance of the sustainability-related disclosure in the advertisement for investors is an indicator of its materiality and therefore it should be included in the prospectus. This would then ensure that there is consistency of information in the advertisement and the related prospectus, as required by Articles 22(3) and (4) of the EU PR.

Practical consideration: Although this aspect is not new, it is interesting that ESMA appears to presuppose that the mere inclusion of information in advertisements could suggest its materiality. This could, for example, be relevant in connection with the use of ESG ratings, and quantitative historic and forecast ESG data, which are frequently featured in advertisements, such as investor presentations, but not disclosed in prospectuses. This practice stems from the cautious stance in the market, where the incorporation of ESG ratings and other ESG data in prospectuses is deemed to require careful consideration due to the current lack of regulation for ESG rating providers and a level of inconsistency in the market around ESG data collection, analysis and reporting. There is also sometimes a misconception that, as long as the ESG information is already public, for example, through prior publications by the issuer, the inclusion of this kind of information in advertisements but not prospectuses is always justified. In light of the ESMA statement, issuers must be prudent in assessing the ESG-related disclosures they include in their advertisements if they do not want to also repeat the information in the prospectus.

What approach are the NCAs likely to take when reviewing prospectuses?

Many NCAs have already updated their websites to include a link to the ESMA statement on their website, as an indication that they will expect issuers to the aware of and adhere to the statement when drawing up prospectuses. BaFIN has already stated that it intends to take ESMA’s statement into account when reviewing prospectuses and expects issuers to comply with the expectations in the statement: BaFin - News - EU Prospectus Regulation: BaFin welcomes ESMA statement on ESG disclosures

Final thoughts

It is interesting that ESMA has published this statement without waiting for the outcome of the specific disclosure requirements that may be proposed under the EU Listing Act given that may take some time.  Clearly ESMA is of the view that there is a need now for more harmonisation and a more coordinated approach amongst the NCAs in relation to sustainability-related disclosure in prospectuses.

When preparing sustainability-related disclosure you should take careful note of ESMA’s statement given that the NCAs may already be looking to adhere to this when they conduct their review.  Although ESMA’s statement sets out its expectations for particular types of securities under the existing rules, you should check whether the requirements and recommendations made in the ESMA statement go beyond what is currently included in your prospectuses. This is not only relevant for the risk factors but also for the information to be included in the final terms in connection with any upcoming issuances.

Overall, the departure from the current best practice is limited. Currently, many issuers are providing information regarding their use of proceeds in their (base) prospectuses and/or final terms. For instance, many final terms include relevant details about sustainable projects, the criteria for project selection, principles guiding the management of proceeds and instructions on obtaining reports and second-party opinions, mostly by referring to websites where those documents are available. However, ESMA has made it clear that references to websites alone are not enough and certain additional information will also need to be included in the base prospectus/final terms as pointed out above. This will certainly lead to further discussion and it will be interesting to see whether going forward disclosure on the green bond framework will become more extensive. It will no doubt become more extensive once the EU Listing Act and EuGB Regulation become applicable.

This note is for guidance only and should not be relied on as legal advice in relation to a particular transaction or situation. Please contact your normal contact at Hogan Lovells if you require assistance or advice in connection with any of the above.

Authored by Jochen Seitz, Andrew Carey, Bryony Widdup, and Isobel Wright.

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