Navigating through the maze of ESG legislation

There is a wide range of new and expansive sustainability-related law impacting the work of today’s investment managers. Martijn Schoonewille and Roderik Boogaard are both attorneys in the Financial Markets & Products group at Loyens & Loeff. Their daily work as members of the ESG team involves analysing and piecing together this complex legislatory jigsaw puzzle on behalf of clients. They head up a break-out session at the Sustainable Finance and Climate Risk Event on Sustainable Finance Disclosure Regulation (SFDR) and Taxonomy Regulation.

SFDR for sustainable investment products

The SFDR is an EU anti-greenwashing and transparency regulation relating to sustainable investment products. Although launched in 2019, its main provisions have been in force since March 2021. A precise set of standards called the level 2 RTS Act will become a disclosure requirement for sustainable investment products as of 1 January 2023. The SFDR is a pillar of the EU Sustainable Finance Action Plan, which also includes the Taxonomy Regulation. Both the SFDR and the Taxonomy are aimed at improving transparency on sustainability between financial institutions and market participants.

What are you hearing from your clients and the market in general, regarding SFDR and applying the taxonomy?

Roderik Boogaard: Asset managers consider both to be highly relevant and they are all working with both SFDR and the Taxonomy. Not only do asset managers want to comply with the entity-level disclosures required by SFDR, but they are also keen to design and launch products with green ambitions. They are therefore deeply interested in the product-level disclosure requirements.

Is the market hungry for this information?

Martijn Schoonewille: Without doubt. There is a clear demand from asset managers for more legal advice on SFDR and the Taxonomy. Obviously, there has been a push from the European Commission and there is quite a daunting amount of legislation coming our way. But at the same time, client interest is sparked by an increased market demand. Our clients are primarily interested in the sustainable classification of financial products. They are seeking not only how to formally comply with the rules, but they also recognize that there is value in designing sustainable products.

Is the market maturing in terms of SFDR and the taxonomy in your view?

Martijn Schoonewille: I think it is. However, in our experience, there has been primarily a focus on the Environmental element of ESG. There is still ample opportunity concerning Social and Governance.

One of the main aims of SFDR is to reorient capital flows towards a more sustainable economy: what are you seeing from your positions regarding this, in the context of SFDR and your clients?

Roderik Boogaard: Asset managers are willing to make a transition to greener investments and greener products. SFDR helps with that because the criteria are more harmonised. What you used to see is that a lot of industries and sectors or even individual fund managers had different ways of reporting, different ways of establishing sustainability criteria. This made transparency rather challenging. This information is now more harmonised in accordance with EU criteria and asset managers want to comply with that and meet these criteria. This comes from a drive to create greener investments and because it also makes commercial sense.

What is next on the regulatory agenda?

Martijn Schoonewille: In Europe we are already rather more advanced on ESG legislation than in some other parts of the world. However, it is no longer specific to Europe alone. The Securities and Exchange Committee in the US is also moving in this direction. Sustainability is now on everyone’s agenda. I personally hope it becomes less of a “thing”, and that sustainability becomes an ordinary part of business.

Roderik Boogaard: In terms of the current legal developments the hottest item is the concrete levels of compliance rules which are detailed in the EU Level 2 Regulatory Technical Standard (RTS). That process is finalised: and will enter into force by the end of 2022. From a practical point of view, market parties are now looking to update their disclosures to bring them in line with the new, more detailed, requirements contained in the RTS, and the latest insights obtained.

Is standardisation a challenge for asset managers?

Martijn Schoonewille: I think there are several challenges. We have helped many clients who were working with their own sustainability rules, and then the standards changed. So, they needed to recalibrate their standards. That is one example where Loyens & Loeff can play a role: we can give clients guidance on this and upcoming legislation such as the RTS. At times it may seem that there is an overwhelming amount of legislation covering this transition, which is not always particularly clear. We therefore provide relevant advice. One of the things we have learned, for example, is that you really need to look at the Taxonomy from multiple disciplines to really be able to delve deep into those requirements.

Do the specialities of your ESG team extend beyond investment management?

Martijn Schoonewille: Certainly. Our firm-wide ESG focus team has some 30 core members from all our practice groups, such as corporate, real estate, infrastructure, finance and financial markets and products. We see a high level of integration between a wide range of sustainability legislation such as SFDR, the Corporate Sustainability Reporting Directive but also the proposed Corporate Sustainability Due Diligence Directive and the Taxonomy regulations. These data flows interact with each other.

Roderik Boogaard: ESG is relevant in all sectors of our business. From large corporates which are now subject to new sustainability rules, both competition and regulatory; to tougher rules on real estate, as well as tax developments, and capital markets developments with, for example, Green Bonds. ESG touches every aspect of our work.

And that’s a good thing, right?

Roderik Boogaard: Absolutely. We are very positive about this and very glad to be able to contribute to this development from a legal perspective. We think it is really encouraging to see that so many clients are working on this subject matter.

What do you hope to gain from the Sustainable Finance and Climate Risk Event?

Martijn Schoonewille: We would like to see a growing awareness of the importance of the relevant legislation and highlight the benefits that an integrated approach to sustainability and ESG will have for investment managers involved in this field.

Roderik Boogaard: SFDR and the taxonomy is also really a legal subject. We sometimes notice that clients mistakenly see this merely as a commercial part of ESG and that they forget the legal side. However, there are strict legal requirements which must be met. The upcoming RTS is highly technical. The guidelines on this from the European regulators are really detailed and complex. Our main aim is to contribute to an increased understanding among market participants of the legal background underpinning these transparency rules.