Sustainability Disclosure Requirements in Prospectuses
The European Securities and Markets Authority (ESMA) issued the sustainability disclosure requirements in prospectuses, aiming to regulate the sustainable information disclosure in the stock market and bond market.
ESMA believes that the effectiveness and integrity of the ESG market is directly related to information disclosure. In the securities market, disclosure is required as long as the environment, society and governance have a certain impact on the issuer. The materiality of information will vary from issuer to issuer and type of securities.
Concerns on Sustainability Disclosure Requirements in Prospectuses
ESMA believes that issuers need to pay attention to some issues when making sustainable disclosures:
- Issuers are required to provide specific data based on their sustainability performance. For example, the particular market standard to which the security complies, and the disclosures required by that standard. Issuers also need to disclose data assumptions and third-party researches to enhance the credibility of information for investors.
- Issuers need to raise the bar on disclaimers. While actual sustainability scenarios may differ from expectations and are subject to changes because of regulatory policy and investor preferences, ESMA does not consider sustainability-related disclaimers an excuse for an issuer’s inability to meet its obligations. For example, in the process of raising funds, the issuer should implement the standards in the prospectus, and cannot mention the possibility of violating the standards in the disclaimer.
- Issuers need to explain sustainability-related definitions and formulas to the public. When it comes to specific numerical calculations, issuers need to improve the comprehensibility, clearly describe the securities structure and explain the definitions and formulas to investors, regulators and other stakeholders.
Contents of Sustainability Disclosure Requirements in Prospectuses
ESMA believes that when issuers write sustainability reports in accordance with the Corporate Sustainability Reporting Directive (CSRD), they need to include these reports in the overall offering documents. When it comes to specific ESG objectives, issuers are required to disclose the use and management of proceeds so that investors can assess the performance of these objectives to monitor their progress.
When issuers formulate sustainable development-related goals, they also need to provide information on key performance indicator (KPI), and inform investors what information will be disclosed after the issuance, and how to obtain this information (through official website, etc.). The issuer’s sustainability commitments involved in publicity before also need to be reflected in the offering documents.
Disclosure of Use of Proceeds Bonds and Sustainability-Linked Bonds
ESMA specifically mentions the sustainability information disclosure requirements for use of proceeds bonds and sustainability-linked bonds. These bonds are popular categories in the current market and require clearer disclosure rules.
For use of proceeds bonds, ESMA requires bond issuers to disclose the feasibility and risks of sustainable projects, and disclose how the funds raised will be used in these projects. The issuers need to calculate the expenses and income of the expected target, and consider whether the early amortization has an impact on the sustainable goals. When a bond is certified sustainable by a third party, the issuers are also required to disclose the information of the third-party certification and the scope of the guarantee.
For sustainability-linked bonds, ESMA requires issuers to disclose the risks faced by KPIs and sustainable development goals, and the impact on investors after these risks occur. For possible changes in interest calculation, issuers need to provide a clear interest calculation procedure in the offering documents, and include KPIs and relevant performance targets as references. The requirements for early amortization and sustainability certification are similar to those for use of proceeds bonds.