As regards Article 4(4) of Regulation 2019/2088, must the calculation of the 500-employee threshold to the parent undertaking of a large group be applied to both EU and non-EU entities of the group wi

The “comply or explain mechanism” The underlying objective of Article 4 of Regulation 2019/2088 is to encourage financial market participants to pursue more sustainable investment strategies in terms of reducing negative externalities on sustainability caused by their investments. The compliance with disclosure requirements under Article 4 should incentivise the interest in investing in activities that do not harm environment or social justice, curb greenhouse gas emissions of their investments, stimulate investee companies to transition away from unsustainable activities and improve their environmental impacts or and even induce portfolio adjustments and divest from investments in activities that are harmful to sustainability. Article 4 also encourages financial advisers to pay more attention to how the consideration of negative externalities is integrated in their investment or insurance advice. This is why the “comply or explain mechanism” under Article 4(1) of Regulation 2019/2088 distinguishes between ‘principal adverse impacts’ and ‘adverse impacts’. Whilst the “comply mechanism” under point (a) of paragraph 1 encompasses the consideration of principal adverse impacts of investment decisions, financial market participants that decide not to apply the “comply mechanism”, must under point (b) of that paragraph that establishes “explain mechanism”, provide clear reasons for why they do not consider ‘adverse impacts’ of investment decisions on sustainability factors. Under point (b), by way of example, financial market participants must provide clear reasons for why they do not consider degradation of the environment or social injustice caused by their investments. The aim of Article 4(3) and (4) of Regulation 2019/2088 is to introduce a more stringent “disclosure mechanism” and reduce a hypothetical incidence of application of “explain mechanism”. Large financial market participants, on solo or group basis, as specified in those two paragraphs of Article 4, must publish and maintain on their websites statements on their due diligence policies with respect to the principal adverse impacts of investment decisions on sustainability factors, i.e. in other words that and how they consider principal adverse impacts. The 500-employee criterion The 500-employee criterion, as laid down in Article 4(3) of Regulation 2019/2088, relates to a financial market participant. The 500-employee criterion as laid down in Article 4(4) of Regulation 2019/2088 relates to the large group, as referred to in Article 3(7) of Directive 2013/34/EU4, in its entirety; the calculation of the headcount takes into account the number of employees of a parent undertaking and of subsidiary undertakings regardless whether they are established inside or outside the Union. Article 4(4) of Regulation 2019/2088 sets out obligations on financial market participants that are parent undertakings which in that capacity, set the group wide policies, including due diligence policies. Therefore, such financial market participants publish and maintain the requested information, adapted to the specific situation of the parent undertaking and not to the group as a whole. The criterion of a group is just relevant for the headcount that triggers the reporting obligations by a financial market participant. Subsidiary undertakings might still qualify as financial market participants subject to Article 4(3) or might be financial market participants that consider principal adverse impacts of investment decisions on sustainability factors as described in point (a) of Article 4(1) of Regulation 2019/2088.