Sustainable finance-related regulatory attention is turning towards financial and non-financial institutions. If you work in the top management of a financial institution or a production company in Germany, you must have heard one or two things about the discussions on voluntary and mandatory disclosures on Environmental, Social, Governance (ESG) issues. If you are an asset manager, you must have learnt about the fiduciary duties, which provide you legal support in considering ESG issues in client portfolios.
Together with Karsten Löffler and Sebastian Rink, we have written a chapter in the new book on sustainable finance Nachhaltige Finanzwirtschaft: Grundlagen und Konzepte für die Praxis (Sustainable Finance: Basics and concepts for practice), which is available in the market since April 2020. In our chapter titled Regulatorische Entwicklungen hin zu einer nachhaltigen Finanzwirtschaft – Historie und Ausblick (Regulatory developments towards sustainable finance – history and outlook), we provide a historical look-back on the fast regulatory developments in Europe, inter alia Germany and make several suggestions on how financial institutions could prepare themselves for the upcoming challenges and opportunities. If you have already felt the regulatory attention in your job, it is time to get an overview on the current situation.
Fast regulatory developments in the past 5 years
From our observations, the fast regulatory developments since 2015 have set the stage and roadmaps for sustainable finance in Europe. The TCFD has set climate-related disclosure in motion. The European Commission sets out the roadmap for financing sustainable growth and is active in supporting various related actions, e.g. the final report on the EU taxonomy is published to facilitate a standardized classification of economic activities. Within Germany, the sustainable finance advisory council is established to develop sustainable financial strategies. In general, sustainable finance guidelines on the national and regional level are being developed for regulatory authorities to ensure a stronger focus on supervisory procedures.
Reducing information asymmetry in the financial market and more
Many policies in the European sustainable finance area have focused on improving the quality and the quantity of information. This is because information is key for the financial market to generate accurate price signals and investors need climate-related information in investment decision making. The regulatory initiatives on improving transparency and strengthening disclosure serve exactly this purpose. Besides, policy discussions also extend to sustainability risks in risk management, sustainable financial product-related measures, financial system governance and incentive systems, and enhancing general research efforts in this field.
A new era has come
EU-level and Europe-wide national strategies and actions signal that sustainable finance is not a fast-fading trend, but rather a long-lasting transformative force in the financial system. Under the COVID-19 crisis, sustainability should remain a key dimension of decision matrix, e.g. in designing the green stimulus packages for economic recovery in Europe. In the new era, in which sustainability is a key consideration in many important political and commercial decisions, it will with no doubt be beneficial for financial and non-financial institutions to stay informed about the regulatory developments and become first movers in the field of sustainable finance.
More details on the regulatory development can be found in our chapter contribution in the book Nachhaltige Finanzwirtschaft: Grundlagen und Konzepte für die Praxis.