Rules for a sustainable financial market — a challenge for companies

Euro­pean legis­la­tors have set them­sel­ves the goal of chan­ne­ling finan­cial flows into sustainable growth and sustainable projects. The idea is not new. For years now, there have been provi­ders on the market promo­ting “green” finan­cial products. But that wasn’t enough until now and was seen more as a “nice to have”. Moreo­ver, until now, ever­yone defi­ned the sustaina­bi­lity of their products them­sel­ves. To date, there are a number of stan­dards, from the Prin­ci­ples for Respon­si­ble Invest­ment (UN PRI) co-spon­so­red by the United Nati­ons to the recom­men­da­ti­ons for sustainable invest­ment stra­te­gies of the BVI fund asso­cia­tion. Now, with the Disclo­sure Regu­la­tion and the Taxo­nomy Regu­la­tion, there are very concrete regu­la­tory requi­re­ments that have the poten­tial to really change things because they want to ensure consis­tency and compa­ra­bi­lity. Against this back­ground, the new regu­la­tory frame­work is also neces­sary, because volun­t­ary action by the finan­cial indus­try is not enough.

For the finan­cial market, the new regu­la­tion, which came along rather quietly, is a mammoth project. Espe­ci­ally for smal­ler finan­cial service provi­ders, this is huge! Super­vi­sion, both at Euro­pean and natio­nal level, will not expect 100% compli­ance here over­night. Still, lawma­kers have to start some­where, and this is just the begin­ning. There will be more concrete regu­la­tion to come in the next few years.

The Disclo­sure Regu­la­tion has alre­ady been in force since March 10, 2021, and aims to provide inves­tors with better infor­ma­tion than before about the sustainable porti­ons of the finan­cial products offe­red. Also, finan­cial market parti­ci­pants and invest­ment advi­sors must now publish a sustaina­bi­lity stra­tegy on their home­page, among other things. This presup­po­ses that every finan­cial market parti­ci­pant deve­lops such a stra­tegy, which does not only consist of fine words. At the moment, we then still have the problem that data on the sustaina­bi­lity of finan­cial products, which should enable the inves­tor to make an infor­med decis­ion, is not yet fully available. So for now, the indus­try has no choice but to imple­ment what alre­ady works and gradu­ally buy in the rele­vant data and adapt its inter­nal processes.

The flip side is that all compa­nies seeking to raise capi­tal via the finan­cial market must now also disc­lose infor­ma­tion and finan­cial data on sustaina­bi­lity aspects. This is just as true for PE funds, via VC struc­tures and other alter­na­tive finan­cing opti­ons as it is for tradi­tio­nal debt instru­ments or tradi­tio­nal equi­ties. The new regu­la­tion ther­e­fore affects not only the finan­cial market, but also the real economy. And ESG is not just about climate aspects, but also about social and corpo­rate gover­nance issues. A social rethink is needed here.

Return on invest­ment is an important keyword. The shift toward a sustainable finan­cial market will not be successful if the finan­cial products that are parti­cu­larly green are not also profi­ta­ble for inves­tors. This applies to both insti­tu­tio­nal and private inves­tors. There is curr­ently a high demand for sustainable products on the inves­tor side. Thanks to the clear requi­re­ments of the Disclo­sure Regu­la­tion, which will be further speci­fied from next year by the asso­cia­ted tech­ni­cal stan­dards that ESMA has alre­ady published as final in Febru­ary 2021, the inves­tor can see very clearly in the docu­men­ta­tion of the finan­cial product in demand what is inside.

The infor­ma­tion now requi­red by regu­la­tion will also enable inves­tors to make compa­ri­sons within a product range, because a market stan­dard will emerge here — also as a result of the Taxo­nomy Regu­la­tion — that shows how green and sustainable a product is. Of course, non-sustainableproducts will conti­nue to be offe­red and may, of course, be purcha­sed.

About Dr. Verena Ritter-Döring
Dr. Verena Ritter-Döring heads the banking regu­la­tory and invest­ment law depart­ment at Taylor Wessing in Frank­furt and has specia­li­zed for many years in finan­cial market regu­la­tion and the corre­spon­ding coor­di­na­tion with the super­vi­sory autho­ri­ties. She helps clients with the imple­men­ta­tion of new regu­la­tory requi­re­ments as well as with legal issues rela­ted to day-to-day compli­ance and the launch of new products or funds. ESG regu­la­tion is curr­ently a key focus area of their advi­sory services. On her blog aufsichtsrechtsnotizen-taylorwessing.de, she and her team provide weekly updates on regu­la­tory law.