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Increasing regulatory pressure on the financial sector to start acting on sustainability

03/09/2020

EU's policy on sustainable finance

The EU's sustainable finance policy supports economic growth while reducing pressure on the environment and taking into account social and governance aspects. As part of the Green Deal, the EU Commission presented the European Green Deal Investment Plan. This framework should channel public and private investments that are required for the transition to a climate-neutral, green, competitive and an inclusive economy. 

Increased sustainability awareness among financial supervisors in Europe

The financial system is an essential element in facilitating economic growth. Prudential regulation and conduct supervision have the objective of creating and maintaining the stability and integrity of the financial industry. 

Financial regulators across Europe are increasingly expounding the view that businesses which have sustainable objectives present a lower business failure and systemic risk. Financial institutions have been under increased regulatory scrutiny by the European financial supervisors. The supervisors want to better understand the financial institutions' vulnerability to climate risk and their readiness for a transition towards a low-carbon economy. 

As a result of the economic, political and social trends regulators and financial institutions support the transition to a sustainable economy by including sustainable factors in risk models, product development and governance frameworks. There is no overall binding regulatory framework for sustainable finance. The EU created a harmonised classification system of uniform criteria for sustainable activities. This taxonomy creates an overall understanding which activities are considered to be sustainable.

Sustainable Finance trends in the Netherlands

Promotion of sustainable forms of finance is fundamental to achieving international policy objectives (Paris Agreement and the UN's Sustainable Development Goals). We expect that, in line with the Dutch Climate Act and the Urgenda case, sustainable trends will play a more dominant role in society. In the Urgenda decision the Supreme Court ruled that the decision of the Court of Appeal remains in force. The Dutch State has to reduce Dutch greenhouse gas emissions at a much faster pace than the Paris Agreement’s goals and ambition (reduction of at least 25% by the end of 2020). Financial institutions play a crucial role in providing financing to more sustainable sectors of the economy. Dutch regulators actively promote this reallocation of credit.

Not only from a credit but also from a risk perspective, financial supervisors have an increasing interest in sustainable trends. Financial institutions are continuously exposed to different risks that could impact financial solidity and the stability of the financial system in general. According to the Dutch Central Bank (DNB) climate risks are identified as a potential threat to the stability of the financial system in general and financial solidity of institutions. In its capacity as a prudential supervisor, DNB should ensure that financial institutions adequately address these potential sustainability risks.

Dutch financial Supervisors and sustainability trends

The Dutch Authority for the Financial Markets (AFM) and DNB are the financial supervisors for the financial industry in the Netherlands. AFM primarily focuses on conduct of business. DNB is the prudential supervisor in the Netherlands. As financial stability is an essential condition for sustainable growth, DNB is committed to a stable financial system including stable prices, solid financial institutions and properly functioning payment transfers. Fostering a forward-looking and sustainable sector is one of the three focus areas for DNB's 2018-2022 Supervisory Strategy. 

As the conduct supervisor, AFM will monitor whether companies provide reliable and accessible information on relevant sustainable factors of their activities. Financial institutions must integrate sustainability into their product development, risk management and investing decisions. Financial institutions have to be transparent about how sustainability is incorporated in the governance and business. Customers of financial institutions need to be adequately informed and advised about relevant sustainable factors in support of their financial decisions. 

How financial institutions are being impacted by sustainability trends in the Netherlands

Legal and compliance teams play a key role in integrating sustainability considerations in regular compliance processes. They also have to understand and anticipate how the normative landscape is evolving. Minimising risk and maximising financial and other benefits of integrating sustainability in financial institutions requires a blend of expertise and tactics:

  • Developing and offering sustainability-oriented (banking) products and engaging with clients on sustainability issues to enable a shift towards sustainable technologies.
  • Relaying transparent information on sustainable products and services inside the organisation and to investors.
  • Creating a more resilient financial institution through an improved understanding of sustainability issues, including environmental and social liabilities by providing targeted trainings to inform business teams and clients about sustainability risk.
  • Proactively addressing legal and compliance aspects of sustainability to better safeguard against lender liability and other risks and to improve the overall resiliency of financial institutions by assessing the relevancy of and ensuring conformity with sustainability regulations and standards in cooperation with risk and sustainability teams. 
  • Supporting the development of internal sustainability policies and ensuring alignment with relevant regulations. Supporting awareness building efforts across the financial institution.

 

Authors

Picture of Simon Hardonk
Simon Hardonk
Counsel
Utrecht