Light green products in the context of a green finance are products that promote environmental characteristics.
The terminology refers to:
- Article 6 of the Taxonomy Regulation and
- Article 8(4) SFDR.
Light green products can be used to invest in a wide range of underlying assets, some of which may not themselves qualify as sustainable investments.
Examples of such investments are hedging instruments, unscreened investments for diversification purposes, investments for which data are lacking or cash held as ancillary liquidity.
Financial market participants making available such financial products should therefore be fully transparent about the allocation of the underlying investments to those categories of investments (Recital 12 of the Commission Delegated Regulation of 6 April 2022 supplementing Regulation (EU) 2019/2088 of the European Parliament and of the Council with regard to regulatory technical standards specifying the details of the content and presentation of the information in relation to the principle of ‘do no significant harm’, specifying the content, methodologies and presentation of information in relation to sustainability indicators and adverse sustainability impacts, and the content and presentation of the information in relation to the promotion of environmental or social characteristics and sustainable investment objectives in pre-contractual documents, on websites and in periodic reports).
Light green products can promote environmental characteristics in a myriad of ways, including in a pre-contractual or periodic document, in their product name or in any marketing communication about their investment strategy, financial product standards, labels they adhere to, or applicable conditions for automatic enrolment.
Light green products have various degrees of sustainability-related ambition.
SMSG advice to the ESA’s Joint Consultation Paper preceding the above Final report recommends: “rather than use, in the context of art 8 products, the wording “the financial product promotes environmental or social characteristics, but does not have as its objective a sustainable investment”, use “…but does not have as its core objective a sustainable investment”” (p. 119). Hence, "light green" products are distinctive in the investors' perception from products named “dark green”. This is reasonable as the said categories are subject to different sets of disclosure rules on the pre-contractual information.
Explanatory Memorandum to the said Commission Delegated Regulation of 6 April 2022 reads:
“Financial products that promote ‘environmental or social characteristics’ – but not necessarily make in part ‘sustainable investments’ with no significant harm – must be accompanied by the disclosures provided for in Article 8 of the Sustainable Finance Disclosures Regulation”.
The specific rules for the above disclosures for light green products are described in the ESA’s Final report of 22 October 2021 on taxonomy-related product disclosure RTS with regard to the content and presentation of disclosures pursuant to Article 8(4), 9(6) and 11(5) of Regulation (EU) 2019/2088, JC 2021 50.
According to the Updated Joint ESA Supervisory Statement of 24 March 2022 on the application of the Sustainable Finance Disclosure Regulation, JC 2022 12 these drafts can (and, of necessity, must) be applied before final rules are promulgated.
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SFDR, Article 8 |
Taxonomy Regulation, Article 6
Transparency of financial products that promote environmental characteristics in pre-contractual disclosures and in periodic reports
Where a financial product as referred to in Article 8(1) of Regulation (EU) 2019/2088 promotes environmental characteristics, Article 5 of this Regulation shall apply mutatis mutandis.
The information to be disclosed in accordance with Articles 6(3) and 11(2) of Regulation (EU) 2019/2088 shall be accompanied by the following statement: ‘The “do no significant harm” principle applies only to those investments underlying the financial product that take into account the EU criteria for environmentally sustainable economic activities. The investments underlying the remaining portion of this financial product do not take into account the EU criteria for environmentally sustainable economic activities.’.
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Commission Delegated Regulation of 6 April 2022 supplementing Regulation (EU) 2019/2088 of the European Parliament and of the Council with regard to regulatory technical standards specifying the details of the content and presentation of the information in relation to the principle of ‘do no significant harm’, specifying the content, methodologies and presentation of information in relation to sustainability indicators and adverse sustainability impacts, and the content and presentation of the information in relation to the promotion of environmental or social characteristics and sustainable investment objectives in pre-contractual documents, on websites and in periodic reports, Recitals 11 - 14 |