Sustainability and financial services is becoming a sector on its own. A sector in which experts in finance, sustainability, compliance and legal work together. CMS Green Guidance is published monthly and keeps you abreast of the most important news in the sector from a legal perspective. A green guide to (new) regulations and trends.
Regulations force financials to do business differently
Sustainability is no longer a showcase
In this first edition, we will speak to Simon Hardonk, advocaat in the Corporate Restructuring & Insolvency practice and Etienne Courbois, advocaat within the Banking & Finance practice. Do they believe the financial sector is prepared for the upcoming ESG regulations? For example the EU Taxonomy and SFDR (Sustainable Finance Disclosure Regulation) that will come into effect in the European Union on March 10, 2021? ‘Everyone has been taken more of less by surprise.’
Are banks and their employees aware of the new regulations that will take effect in 2021?
Courbois: ‘It is starting to become known in the sector, especially as there are deadlines approaching. The deadlines make it something to be dealt with.’
Hardonk: ‘There is awareness, especially as the European financial regulations are paired with solid deadlines, also presenting administrative pressure. The SFDR and the EU Taxonomy should be, and as I have seen around me, is top of mind. However, businesses are not prepared for implementation. For a long time it was unclear what these regulations would entail and even now the rules for implementation are still not finalised. Therefore, people have been taken by surprise. This does not alter the fact that both the Netherlands Authority for the Financial Markets (AFM) and the Dutch Central Bank (DNB) have said that they see these sustainability regulations as an important point of attention and that they will seriously monitor these topics.’
Enforcement of the SFDR will commence in March 2021. Asset managers must then, among other things, submit statements about negative impact. That's pretty fast. Do you see opportunities or dangers?
Courbois: ‘SFDR and EU Taxonomy are going to force financials to do business differently. This will change the entire business and will apply to everyone. It would be good to stay ahead. Those who have their business in order will have a head start when compared to the competition. These new regulations can be seen as a compliance issue but also as a business opportunity.’
Hardonk: ‘I don’t really see that happening yet. No one seems to be ahead of the crowd.’
Courbois: ‘As soon as these sustainability regulations start having an impact on the provided services, and they will, this will change. ’
Hardonk: ‘For an investment fund with a limited portfolio where sustainability has been part of the DNA for some time, this process is of course simpler than for investment fund managers who are part of a bank that also operates internationally. But they too will be affected by the regulations.’
Which department will the activities end up in? Compliance, legal, the ESG teams or a combination?
Hardonk: ‘This is a recurring conversation: does SFDR belong with compliance or sustainability? I think compliance is logical. Which department ultimately introduces the new regulations within an organization is less relevant, the most important thing is that responsibility is taken internally and that the entire organization complies with the new rules at product level. The days that sustainability was mainly about reputation and commerce are gone.
Compliance has direct contact with regulators and that is important as these regulations are also new for them. For both the financial institution and the regulator, it is not practical to deal with new subjects with completely new teams. Based on our expertise, we can also help, not so much with the day-to-day implementation, but with the strategy and questions such as: what are the current regulations, how will they change and what do you need to do to be ready?’
Courbois: ‘For a long time we thought: someday. This day has come. We are now confronted with the question: what do we need to do to meet the requirements? That can be complicated, especially when multiple countries and regulators are involved.’
Will it help if the responsibility is placed higher in the organization?
Courbois: ‘If you want your company to be convinced of the urgency, it may definitely help to put someone who has a mandate in charge.’
Hardonk: ‘When it comes to attracting top talent, it will also certainly pay not to lag behind in the field of sustainability.’
As businesses, many banks must be compliant themselves and at the same time arrange things properly for their customers. Do you see a difference in how this is dealt with?
Courbois: ‘At first, this will be the same, but the implementation is by definition different. Thus, as a financial organisation, you will ultimately need different teams.’
Hardonk: ‘When it comes to prudential supervision – what are the risks for the bank itself, what are the climate and transition risks – these fall under the supervision of the DNB. The AFM enforces the regulations on the product side. Then you have to decide what products do I offer my customers and how carefully do I treat my customers? How transparent am I with regard to sustainability as an entity? That’s outward-looking, or behavioural supervision.’
Courbois: ‘We see that it is taken seriously. As an organisation, it pays to show the regulators that you are serious about it. This helps create understanding in case the implementation does not take place on time.’
So it is actually more important to just start and not to wait and see?
Hardonk: ‘Sustainability has now become a social trend, with the associated market forces. You can already see that consumers are willing to invest in sustainable funds. Sometimes the fact that the fund is sustainable is more important than a good return. Thus, if that consumer has a choice, and it is made easier by the transparency that is now being imposed, then the market will do its job. In that sense, this taxonomy and SFDR is nothing more than a framework for that social trend. It will be slightly different in every country within the European Union. The objective of SFDR is precisely the uniform provision of information about sustainability, so that the investor can take this into consideration which planning his investment strategy.’
You have given reading tips below. Why do you also recommend the E-book?
The E-book outlines the contours of this trend and after reading you will realize that action really must be taken. Sustainability is no longer a showcase, The urgency is clear. In the E-book you will find concrete tips, timelines and recommendations with which to work.