News Update Financial Regulatory

6 October 2020

The Houthoff Financial Regulatory team closely monitors developments on the financial markets and within financial supervision. In this News Update, we highlight some important climate change developments from a financial regulatory point of view.

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Why Houthoff is focusing on climate change

Dealing with new or changing climate legislation is a continuing challenge for all aspects of our clients' businesses, including financial regulatory.

In the financial regulatory area, climate change measures are beginning to take concrete form. The legal framework is becoming more defined. In July, the Taxonomy Regulation entered into force, and a draft delegated regulation will be published for feedback later this month. The increase in publications by the European supervisory authorities (the "ESAs") and other legislatures and regulators also shows the growing importance of climate change. However, the law is still developing and needs to be refined.

What is sustainable finance?

Sustainable finance is the process of taking due account of environmental, social and governance ("ESG") considerations when making investment decisions in the financial sector, which increases longer-term investments in sustainable economic activities and projects. More specifically, environmental considerations include climate change mitigation and adaptation, as well as the environment more broadly, such as preserving biodiversity, preventing pollution and growing the circular economy. Social considerations include inequality, inclusiveness, labour relations, investment in human capital and communities, as well as human rights issues. Good governance of public and private institutions, including management structures, employee relations and executive remuneration, plays a fundamental role in ensuring that social and environmental considerations are included in the decision-making process.

Taxonomy Regulation introduces environmentally sustainable labelling

On 12 July 2020, the Regulation on the establishment of a framework to facilitate sustainable investment ("Taxonomy Regulation") entered into force. It uses a common concept of environmentally sustainable investment to introduce requirements for financial market participants or issuers regarding labelling financial products or corporate bonds that are marketed as environmentally sustainable. This addresses and prevents obstacles to the functioning of the internal market.

The Taxonomy Regulation integrates consistent ESG considerations into the investment and advisory process across sectors. This should ensure that financial market participants (Undertakings for Collective Investment in Transferable Securities ("UCITS") management companies, Alternative Investment Fund Managers ("AIFMs"), insurance undertakings, Institutions for Occupational Retirement Provisions ("IORPs"), European Venture Capital Funds ("EuVECA") managers and European Social Entrepreneurship Funds ("EuSEF") managers), insurance distributors or investment advisers, who receive a mandate from their clients or beneficiaries to make investment decisions on their behalf integrate ESG considerations into their internal processes and inform their clients of these. Furthermore, the Taxonomy Regulation introduces new categories of low carbon and positive carbon impact benchmarks to help investors compare the carbon footprint of investments. This should facilitate investments in sustainable projects and assets across the EU.

The Taxonomy Regulation sets out uniform criteria for determining whether an economic activity is environmentally sustainable. It also outlines a process involving a multi-stakeholder platform to establish a unified EU classification system based on a set of specific criteria, to determine which economic activities are considered sustainable.

The European Commission's next step for sustainable finance will be publishing the draft delegated regulation on climate change mitigation and adaptation under the Taxonomy Regulation for feedback later this month. We will look at this in a forthcoming News Update. In any case, do not hesitate to contact us if you have any questions on this subject or the implications for your business.

Other financial regulatory publications on climate change

Recently, legislatures and regulators for the financial markets and financial supervision published several reports, surveys and other information on climate change. We have highlighted a selection of these publications.

European publications

• On 30 April 2020, the Basel Committee on Banking Supervision ("BCBS") published a stocktake report on its members' existing regulatory and supervisory initiatives on climate-related financial risks.
• The European Central Bank ("ECB") joined the executive body of the Network for Greening the Financial System ("NGFS") in July 2020.
• On 16 July 2020, the ESAs, namely the European Banking Authority ("EBA"), the European Insurance and Occupational Pensions Authority ("EIOPA") and the European Securities and Markets Authority ("ESMA"), each published a response to the European Commission’s consultation on the renewed sustainable finance strategy.
• On 17 September 2020, the EBA published an online survey seeking input from credit institutions on their practices and views on disclosure of information on ESG risks.
• On 21 September 2020, the ESAs (EBA, EIOPA and ESMA) published a survey seeking public feedback on presentational aspects of product templates, under the Regulation on sustainability‐related disclosures in the financial services.
• On 22 September 2020, the ECB announced that bonds with coupon structures linked to certain sustainability performance targets will become eligible as collateral for Eurosystem credit operations and also for Eurosystem outright purchases for monetary policy purposes, provided they comply with all other eligibility criteria.

Dutch publications

• On 10 March 2020, the Dutch Central Bank, De Nederlandsche Bank ("DNB"), published a DNBulletin about insurers reducing carbon footprint by scaling down equity investments in specific sectors.
• On 24 June 2020, DNB issued a press release on the NGFS (chaired by one of DNB's directors) publishing climate scenarios for forward looking climate risks assessment, a user guide, and an inquiry into the impact of climate change on monetary policy.
• On 25 June 2020, the Dutch Authority for the Financial Markets ("AFM") published a position paper (in Dutch), in which the AFM broadly describes what it expects from market parties in the area of sustainability and how this will be supervised.
• On 3 July 2020, the Dutch government responded positively to an initiative policy document on creating a sustainable financial sector, called Van oliedom naar gezond verstand: verduurzaming van de financiële sector.
• On 3 July 2020, the AFM sent a letter (in Dutch) to investment firms and management companies under its supervision with points of reference on implementing new laws and regulations on sustainability.
• On 20 August 2020, the Dutch Ministry of Finance launched a consultation on amending the Decree implementing EU regulations financial markets (Besluit uitvoering EU-verordeningen financiële markten). The AFM is designated as the competent authority for the Regulation on sustainability‐related disclosures in the financial services sector and the Taxonomy Regulation.

US publications

• On 23 June 2020, the US Department of Labor proposed a new rule discouraging pension plans from considering ESG issues when choosing investments.
• On 9 September 2020, the US Commodity Futures Trading Commission's ("CFTC") Climate-Related Market Risk Subcommittee of the Market Risk Advisory Committee released a report entitled Managing Climate Risk in the U.S. Financial System.

International publications

• On 22 September 2020, the World Economic Forum released a set of universal ESG metrics and disclosures - developed in collaboration with Deloitte, EY, KPMG and PwC - to measure stakeholder capitalism that companies can report on regardless of their industry or region.