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.