I’m delighted to share with you this piece on sustainable finance – following on from the same author’s introduction to special purpose acquisition companies (SPACs).

Monica Sandor has been an English translator at the Belgian Financial Services and Markets Authority (FSMA) for 15 years, and I have also had the pleasure of working with her. She also has an academic hat, having spent 11 years teaching at Queen’s University in Canada, and 4 years at a postgraduate institute on marriage and the family in Brussels, Belgium. Over to you, Monica!

* * *

The concept of ‘sustainable finance’ has been a little slower in coming than sustainability in other domains (agriculture, forestry, etc.), but it is the logical consequence of paying attention not only to individual companies’ practices but to the resources that fund activity in various sectors.

Regulators worldwide have therefore taken a close look at just what criteria are and should be applied to define an investment (or a sector) as ‘sustainable’. Among them, the International Accounting Standards Board (IASB), the European Commission, and national financial regulators such as the Belgian Financial Services and Markets Authority (FSMA) have been very active in the past 2-3 years in analysing sustainable finance. In particular, they seek to ensure that when a company or investment fund describes itself as ‘sustainable’, it is not merely jumping on the bandwagon of the latest selling point and claiming to be greener than it really is: a public relations measure that has come to be known as ‘greenwashing’.

The EU has recently produced a series of legislative instruments and studies to define the contours (the ‘taxonomy’) of ‘sustainability’. The European Commission published an ‘Action plan: financing sustainable growth’, known as the ‘European Green Deal’, in March 2018. Its aim is to make the European Union climate neutral in 2050. This was followed by Regulation (EU) 2019/2088 of 27 November 2019 on sustainability-related disclosures in the financial services sector (SFDR). That Regulation was accompanied by Regulation 2019/2089 of 27 November 2019, amending Regulation (EU) 2016/1011 as regards EU Climate Transition Benchmarks, EU Paris-aligned Benchmarks and sustainability-related disclosures for benchmarks. Much of subsequent reflection and work has concerned the ‘benchmarks’ to be achieved, and how these are to be calculated so that each jurisdiction is using comparable measurements.

Regulation (EU) 2020/852 of 18 June 2020 on the establishment of a framework to facilitate sustainable investment is the most recent EU legislation on the topic. Its aim is to set out criteria for determining whether a given activity qualifies as ‘environmentally sustainable’. In April 2021, the European Commission launched a ‘Proposal for a directive of the European Parliament and the Council amending Directive 2013/34/EU, Directive 2004/109/EUC, Directive 2006/43/EC and Regulation (EU) N° 537/2014, as regards corporate sustainability reporting. It should be remembered that regulations have direct effect in the Member States once they enter into force, whereas directives first require transposition (also known as implementation) in domestic legislation. Therefore, regulations can generally be expected to make an impact sooner than directives.

The three European supervisory authorities (ESAs) in the financial sector have also devoted considerable attention to the subject of sustainability. For example, the European Securities and Markets Authority (ESMA) made sustainable finance one of the priorities in its 2020 Work Programme. The European Insurance and Occupational Pensions Authority (EIOPA) has held five sustainable finance roundtables, the latest on 18 November 2021.

The ESAs have studied the 2019 Sustainable Finance Disclosure Regulation in depth and discovered that there are some ambiguities remaining as to the interpretation of its provisions. On 29 July 2021, it therefore put a series of questions to the European Commission regarding sustainable financial disclosures, in particular as these apply to Alternative Investment Fund Managers (AIFMs) and to parent companies in large groups. They also raised questions about whether a minimum percentage of sustainable investments is required for a financial product to promote itself as targeting ‘sustainable’ investments. There is also a question about whether the disclosure requirements in the above-mentioned Regulation apply only at portfolio level or also at the level of standardised portfolio solutions. The questions and the Commission’s answers are available here.

Meanwhile, because of the length and technical detail of the regulatory technical standards (RTS) under the SFDR, the date for implementation of the next phase of sustainability-related disclosure requirements under that Regulation has been deferred by 6 months from its original date of 1 January 2022 to 1 July 2022.

National supervisory authorities have also been devoting a great deal of attention to the standards for sustainable disclosures. The Belgian FSMA has published two studies on non-financial reporting: Study no. 47 in March 2019 (available in English here) titled “Compliance by Belgian listed companies with the requirement to publish a non-financial statement”. This was an in-depth examination of the 2017 non-financial statements published by Belgian listed company. In June 2021, the FSMA followed up on this with Study no. 48 on “Non-Financial Reporting: Follow-up study and guidelines for Belgian listed companies” (available in English here). Non-financial statements are a relatively new form of reporting, the contents of which are set out in the Non-Financial Reporting Directive 2014/95/EU, the Commission’s (non-binding) Guidelines on Non-Financial Reporting of 2017  and the Commission’s (non-binding) Guidelines on reporting climate-related information (2019). Such statements include reporting on the ESG (environmental, social and governance) criteria, which cover social, employee-related and environmental matters, respect for human rights and the fight against corruption and bribery.

Recently, a policy officer at the FSMA, Sébastien Wolff, authored a scientific contribution titled “Maintaining coherence in sustainability coherence in sustainable finance regulation: the regulator’s role” to a volume on Sustainable Finance in the EU and Belgium (ed. V. Colaert, De Keure, 2021). He approaches the place of the regulator in sustainable finance at a more philosophical level, examining how to ensure coherence and consistency across the sector and different states. To do so, he argues, the regulator fulfils the role of both laying down criteria or guidelines for sustainable reporting, and of analysing on an ongoing basis the results of these efforts, the compliance of the sector, and what new challenges may arise over time in this fast-changing area.

Since the task of financial regulators is to ensure the smooth functioning of the market (which implies a level playing-field) and to protect investors, their focus is principally on how best to assess, at the launch of an economic activity or investment and during its operations, whether the company in fact honours its stated commitments to the ESG principles and to the transition to carbon-neutral industry and sustainability. The regulators are developing “decision tables”, checklists and other points to consider in order to guide companies in this reporting, and analyse the outcomes of such reporting, whether in a prospectus, an advertisement, a non-financial report, an information note, etc. In the same vein, those who sell investment products (banks, investment firms, intermediaries…) are also expected to take into account their client’s sustainability preferences, and provide them with transparent information about the specifics of the sustainability of a company’s activities.

At international level, sustainability and the relevant non-financial disclosures have been a top priority. In June 2021, the Board of the International Organization of Securities Commissions (IOSCO) published a report (developed by IOSCO’s Sustainable Finance Taskforce) on issuers’ sustainability-related disclosures.

An important aspect of IOSCO’s work in this regard has been to engage with the International Financial Reporting Standards (IFRS) Foundation’s efforts at setting a baseline for jurisdictions to consider when implementing their own sustainability-related disclosure requirements. In this regard, a proposal was made to establish a separate global regulator, known as the International Sustainability Standards Board (ISSB), to set sustainable finance standards. This proposal was agreed on at the COP26 gathering in Glasgow, Scotland, on 3 November 2021. The new board will have offices in Frankfurt and in Montreal in the first instance, to be followed by an office to cover the Asia-Pacific region (site yet to be determined). Canada’s bid last July to host the new body stressed that country’s commitment as a partner “in the global fight against climate change” and to moving “towards mandatory climate-related financial disclosures” (see Finance Minister/Deputy Prime Minister Chrystia Freeland’s letter).

The new Board is expected to play a major role in ensuring global harmonization of standards defining ‘sustainable’ practices and of climate-related disclosures, thereby helping to prevent forum shopping. After all, one can adopt all the policies and laws one may wish to limit carbon emissions, set up ‘cap and trade’ systems or carbon taxes, but if there is no agreement as to how companies and providers of capital define ‘sustainability’, then such policies may fall short of the desired effect.

by Monica Sandor, November 2021