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Around five years ago, Frans van der Eerden started to give presentations to financial sector clients and potential clients about regulations that he saw coming on the horizon. As a partner in the Banking & Finance Practice group at NautaDutilh, Frans’ focus is on helping clients in the financial sector comply with regulations. He could see that, particularly in the environmental arena, ‘soft law’ publications and guidance, such as the UN Sustainable Development Goals and the Global Reporting Initiative, a framework for companies to report on their sustainability and environmental impacts, were beginning to morph into actual law – enforceable requirements from Brussels and The Hague. ESG was expanding from the non-profit sector into parliament buildings, and from there to boardrooms.

“I always advocated the holistic approach in those seminars,” Frans recalls. The banks, insurance companies, and asset managers he was speaking to were not going to be helping themselves if they had a few people working in different areas of ESG, such as disclosure or mitigation of climate change risks. “Because what you do in your transparency will have an impact on your risk mitigation techniques that are necessary, which will have an impact on your data requirements, which will have an impact on your IT, which will have an impact on the relationship with your shareholders and even your accountant.”

In the past few years, the European Union has indeed imposed a broad set of ESG regulation on the financial sector. In March 2021, the European Union implemented the first mandatory rules on disclosures relating to the environmental characteristics and sustainability objectives of financial products. Known as the Sustainable Finance Disclosure Regulation (SFDR), this legislative action aims to harmonise how financial market parties report on their ESG initiatives, policy, and strategy. It may of course also nudge investors toward more-sustainable companies. “The SFDR forces financial institutions to put down in writing how their products work and how ESG is integrated into them,” Frans explains.

Shortly after SFDR was introduced, there followed, at the beginning of 2022, the EU Taxonomy Regulation. This is a classification system for economic activities that the EU regards as sustainable within six objectives, such as climate change mitigation, climate change adaptation, and transition to a circular economy.

Compliance through adaptation
“Every month we get a pile of new regulations and other regulatory publications,” Frans says. “You can talk about ESG all week, and then the following Monday there are new developments, new guidelines, draft regulations, soft law publications, and other relevant materials. So you can start reading and discussing all over again. Of course, that can be a threat to the progress of implementing your ESG strategy and making sure you comply with the rules. That is why we need to adapt to working with constantly changing rules that are not even in finalised form when they are applied. Everyone needs to grow into new rules and new concepts
all the time.”

'We need to adapt to working with constantly changing rules that are not even in finalised form when they are applied'


It’s a challenging environment. With so much changing all the time, “It is difficult for companies to truly know what has to be done,” Frans says. Fortunately, he has built plenty of experience in this arena. Although, he did not start out wanting to practice law. He began his university education studying the law alongside physics. “I have a science background and really love the subject,” he says, “but I never really felt that I truly belonged in the field.” He found that he had a better fit in law, where law students would be discussing not just the law but also politics. And there was also more time for other things, such as sports.

Frans also found the flexible interpretation and evolving understanding of the law to be appealing. “In physics, there’s a truth and a wrong. And in law, everything is debatable,” he laughs. At the same time, there are similarities between his legal practice and his former field of study. “In physics, one thing is connected to another and they interrelate to degrees,” and financial regulatory law is a bit like this as well. “While there are of course always principles such as reasonableness and fairness, it’s pretty mathematical, with a systematic set of rules that are all connected,” Frans says.

Embedding ESG throughout organisations
The days of needing to explain to clients the importance of dedicating significant resources to ESG are over, according to Frans. “It’s not just an ‘ESG steering group’ within our clients anymore. Various departments within companies are working on ESG, be it the legal department, compliance, the business side, or IT. Each of them has their own questions about the ESG rules and regulations. And we have definitely seen growing attention and dedication within the management and supervisory boards. I think there is a true commitment in the financial sector.”

Which isn’t to say the sector is finding it easy to navigate the space. Experts generally regard the conceptual framework behind the Taxonomy Regulation and SFDR as solid: Identify activities that the Taxonomy recognises as sustainable; demonstrate how much a fund or other investment product is aligned with such activities; disclose adverse impacts of the activities, such as the effects on biodiversity of a wind farm; set minimum standards under the rubric of ‘do no harm’, and enable engagement to guarantee responsible governance.

The problem, as with so many things concerning the law, is in the details. These requirements demand a volume of data from the ‘real’ economy – manufacturers, producers, and service providers – that are not yet available. Frans provides a hypothetical example of how this could complicate matters.

“Maybe right now, an asset manager is convinced that a target company is green. But when they show their actual data, it’s not as green as the asset manager thought. Maybe then you need to divest from that company to stay green.”

Issues could also arise as rules pertaining to the regulation continue to be developed, for example under the Taxonomy Regulation. “What you may truthfully now call green might, in two or three years, turn out to be not complying with new rules,” Frans explains. “It’s not that people are pretending that things are green when they know they’re not; it’s that the rules and regulations are not clear yet.” Sorting these matters will no doubt keep Frans and his group busy for some years yet.

Greening companies through investment
Frans finds that the realisation is spreading both in the financial sector and the ‘real economy’ that ESG is now fundamental to the success of each. In the early days of ESG, debates took place over whether ESG data, such as a company’s emissions, was material to the company’s finances. Accountants and some prudential regulators such as the European Central Bank had argued that since there was no line for such data in generally accepted accounting or prudential principles, it couldn’t – and shouldn’t – be included. Proponents, including notably the Dutch Central Bank, have always countered that emissions represented a liability, since they would be priced eventually.

Those debates are over. “Investors increasingly want sustainable investments,” Frans says. “So already that makes non-sustainable investments less attractive.” It is now also broadly accepted that enhanced prudential requirements for financials investing in potentially stranded assets and assets that face climate risks should be applied. As such, whether by force of law, or the changing dynamics of society, he posits, somewhere in the near future only electric cars may be available.

'I think there is a true commitment to ESG in the financial sector'


It’s not just the industries that are commonly linked to carbon footprints which are facing this development, Frans maintains. In finance, “non-sustainable investment portfolios are generally anticipated, in the end, to be not as financially successful. The enhanced ESG transparency and focus on climate risk mitigation within the financial sector will also translate into an adjustment of how the ‘real economy’ is funded.” By extension, he says, these regulatory developments are not only of core relevance for the financial sector, but perhaps even more so for the ‘real economy’. “If you don’t incorporate sustainability and have a vision on sustainability in your strategy, I doubt whether you will be able to continue to thrive.”

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