1. Sustainable Finance – expectations from the regulator and the role of transition plans
2. Spotlight on ESG developments:
- Governance
- Disclosure
- Litigation

1. Sustainable Finance – expectations from the regulator and the role of transition plans

The Dutch Central Bank (DNB) recently published its updated sustainable finance strategy 2021-2025. ‘Old wines in new bottles’ to a certain extent, but with a number of interesting nuances and new accents. The bottom line remains that DNB wants to keep leading by example in prioritising sustainability.

DNB has however added an important new paragraph which will likely impact financial institutions as well as their clients. On the ESG factors in the institutions’ risk assessment frameworks, DNB says: “We will announce in 2024 when we will assess institutions’ compliance and, where necessary, take enforcement action.”

Regulatory supervision will include financial sector ESG action plans
“The ambitions and targets which financial institutions have laid down in the Dutch Financial Sector Climate Commitment are a key part of our supervision,” DNB states. “Insufficient adherence to the action plans announced by the signatories in the Climate Commitment in 2022 can be a source of reputational and litigation risks, which is why we will consistently include such plans in our risk assessment.”

In other words, the action plans published by financial institutions will become an integral part of the financial sector supervisor’s regulatory risk assessment framework. Action plans with regard to voluntarily signed sustainability commitments or covenants also play a role in this supervision. This includes targets that have been set at an ambitious level. Such voluntary targets may become ‘hard targets’ in the context of regulatory supervision: not meeting them may be seen as a regulatory risk.

DNB expects enhanced risk management efforts and mitigating measures if it is likely that targets are not met. Also, potential adjustments of targets may be necessary. The impact of such adjustments and mitigating measures must also be integrated in the ESG and risk management framework.

DNB enforces ambitious ESG framework for Dutch institutional investors
As supervisor of European systemic banks, the European Central Bank (ECB) indicated that climate targets have to be adequately incorporated in the banks’ operations as of 2024 as well. Otherwise, these banks may face regulatory actions. DNB now seems to follow this approach in the regulatory supervision of Dutch banks, insurance companies and pension funds. These institutions together represent an immense value of investments and funding capacity in the Dutch, as well as the foreign economy. This formal regulatory requirement to implement prevailing sustainability plans, reduction targets and ESG ambitions may thus not only impact the financial institutions themselves, it also has consequences for the ‘real economy’: their clients.

Relevance for companies, borrowers and other clients of financials
In our view, this is an important note for banks, insurance companies and pension funds, but also for companies and other parties that receive funding from them. These companies need to know that their financiers may be under formal requirements to achieve certain sustainability targets. It may thus be advisable for financials and their clients to pre-empt any regulatory enforcement and work together to achieve ESG targets and a sustainable funding relationship.

What it means for you:

• For financials: implementation of ESG action plans is key
  DNB’s strategy emphasises the importance of robust and holistic ESG governance. Implementation of the ESG action plans and transparency on ESG progress is key, as well as a systematic approach of potential shortfalls. Not only for the largest banks, but for all financials under DNB’s supervision. DNB expects results. Action must be taken in order to make a fitting contribution to objectives such as the Climate Agreement.
• For financials communicating ESG objectives: ensure solid action plans and status updates
  Careful drafting and communication of action plans and status updates is of paramount importance. Plans must be solid, meeting regulatory requirements such as the Sustainable Finance Disclosure Regulation (SFDR) and the Corporate Sustainability Reporting Directive (CSRD), taking stakeholders’ expectations into account and, of course, expressing the ambitions to contribute to a more sustainable environment. At the same time, DNB’s statement shows that committing to targets that are uncertain or even unlikely to be met, may lead to important risks and regulatory action. Clear communication on uncertainties and dependencies may be helpful to address this.
• For corporates: understanding the impact on funding opportunities
  Many financials have taken steps to meet their ESG targets while many of their clients make good progress towards more sustainable business operations. On the other hand, companies that are reluctant to make sustainable changes may face more problems when searching for suitable solutions. DNB’s approach reinforces this, and may thus have considerable indirect effect on the ‘real economy’. Companies should therefore take good note of the importance of cooperation with their funders and investors to contribute to meeting ESG goals.

2. Spotlight on ESG developments

The latest developments in governance

Update on Financial Sector Climate Commitment
On 20 July, the Dutch Association of Banks, the Dutch Association of Insurers, the Federation of Dutch Pension Funds and the Dutch Fund and Asset Management Association published an updated version of the Financial Sector Climate Commitment. This document aims to provide guidance on the elements of climate action plans and on measurement of the CO2 contents of loans and investments.

ECB opinion on CSDDD – role of transition planning and transition finance
On 14 July, the ECB published its opinion on the proposal for a Directive on corporate sustainability due diligence (CSDDD). A separate technical working document sets out specific and reasoned drafting suggestions where the ECB recommends changes to the proposal. An interesting observation: the ECB stresses the need to consider and recognise the role of transition planning in firms when introducing civil liability in relation to the adverse effects of lending. This is crucial to ensure that banks can finance the transition efforts of clients that have not yet met the EU climate targets and the Paris Agreement but intend to do so. The ECB also notes that good management of transitional risks includes process risk management.

European Council on export credits for renewable energy, climate change mitigation and adaptation and water projects
On 14 July, the Council adopted two decisions setting the EU’s position on proposed changes to the Arrangement on Officially Supported Export Credits. The first decision modernises the arrangements in order to enhance flexibility. The second decision concerns the proposed amendment of the Sector Understanding on export credits for renewable energy, climate change mitigation and adaptation, and water projects. The purpose of the change is to expand the scope of the Sector Understanding and allow exports from a broader range of industries to benefit from its terms. The decisions enter into force immediately after their adoption.

Dutch Parliament debates criminalising ecocide
On 13 July, the Dutch Parliament launched the consultation on the legislative proposal for a criminal act on ecocide. The proposed act aims to introduce a new norm in criminal law: that the environment has an intrinsic value and that seriously damaging that environment, by a human act or omission, is a criminal offence. To enable enforcement, the concept of ‘ecocide’ will be introduced in Dutch law: criminal and serious degradation of the environment by (potentially) damaging acts or omissions. This means that commission of ecocide would be included as a criminal offence in the Penal Code.

ESMA Public Statement on Sustainability Disclosure in Prospectuses
On 11 July, ESMA published a public statement on sustainability disclosure in prospectuses, directed at National Competent Authorities to encourage coordinated action on sustainability-related disclosure in prospectuses under current legislation. ESMA emphasises that issuers and advisers should also consider the statement when preparing a Prospectus Regulation-compliant prospectus with sustainability-related disclosure. Key takeaways include the need for substantiating sustainability claims, avoiding misuse of risk factors, and meeting additional disclosure requirements. Specific requirements for items like 'sustainability linked bonds' and 'use of proceeds bonds' are mentioned and ESMA stresses consistency between prospectuses and marketing materials regarding sustainability disclosures. There is some overlap with the focus points that AFM uses for its review of prospectuses relating to the issuance of sustainable bonds and other prospectuses that contain sustainability-related information.

EC Recommendation on sustainable transition finance
The EC Recommendation published in the Official Journal of the EU on 7 July 2023 (page 19) clarifies the concept of transition finance. The Recommendation provides extensive guidance on transition finance and transition planning and on using the existing framework to support solid transition planning. Undertakings, financial intermediaries and investors, member states and supervisory authorities could raise, provide or approach transition finance through the voluntary use of sustainable finance tools as set out in this Recommendation.

DNB updated its Sustainable Finance Strategy
DNB published a new version of its Sustainable Finance Strategy 2021-2025 on 6 July, once again stressing the strategic priority of fully integrating sustainability into all our core functions. An important statement is that DNB will be more stringent in monitoring the management of sustainability risks and voluntary commitments made by financial institutions around sustainability. In 2024, DNB will announce when compliance by financial institutions will be assessed and when violations will be sanctioned. The Climate Commitment of 2022 is indicated to become a more important element in DNB's supervision.

Legislative proposal to prevent discrimination in personnel recruitment and selection
On 14 March, the House of Representatives adopted a legislative proposal pursuant to which all employers in the Netherlands are obliged to have practices in place to prevent discrimination in the recruitment and selection of personnel. As proposed, an employer must have written practices aimed at preventing labour market discrimination at its disposal. Such practices shall prescribe that the recruitment and selection procedures are based on job requirements relevant for the position, whereas the procedures and methods must be transparent and verifiable, and systematically organised. The legislative proposal is currently before the Dutch Senate.

The latest developments in disclosure

ESMA publishes updated implementation timeline for Sustainable finance package
On 3 August, ESMA published an update of the Sustainable finance implementation timeline. The timeline runs from 2021 to 2028 and covers the key implementation dates for the SFDR, Taxonomy Regulation, CSRD, IDD, UCITS, AIFMD and for MiFID.

Final European Sustainability Reporting Standards (ESRS) are published
On 31 July, the EC adopted the Delegated Regulation supplementing the European Accounting Directive with regard to the ESRS (as amended by the CSRD). Annex I contains the ESRS, while acronyms and a glossary of terms are given in Annex II. The EU website includes a page with a timeline of the initiative, stakeholder's feedback and other language versions and a Q&A on the new Delegated Regulation. The Delegated Regulation and the ESRS will apply from 1 January 2024. Our blog on this topic briefly explains the differences between the consultation version and this final version, and provides a full comparison of the two documents.

Draft bill published for (partial) CSRD implementation in Dutch law
On 17 July, a consultation on the draft bill for the partial implementation of the CSRD in Dutch law was published. The draft bill implements the CSRD provisions on the audit of sustainability reporting and the provision on sustainability reporting by listed companies. The consultation period runs until 10 September 2023. The remaining provisions of the CSRD will be implemented through an order in council (AMvB).

ACM publishes study results on consumer perception of sustainability claims
The ACM commissioned a study to find out how consumers perceive true and false sustainability claims made by companies and published the results on 31 July. Overall, some differences were found in the perception of sustainability claims because of consumer background characteristics such as age, education or gender. According to the ACM study, it appears that concrete claims tend to be found more understandable and credible. Nuanced claims tend to be found more credible than absolute claims.

ESG Data and Rating code of conduct consultation (ISRG and ICMA)
The ESG Data and Ratings Working group (DRWG) is seeking feedback on the Draft Voluntary Code of Conduct for ESG Ratings and Data Product Providers. The code introduces clear standards for ESG ratings and data products providers and clarifies how such providers can interact with wider market participants. The consultation period runs from 5 July to 5 October 2023 and the final code is due to be published at the end of 2023.

Dutch government welcomes EU proposal to regulate ESG ratings
On 14 July, the Dutch government published an announcement confirming the importance of ESG ratings for capital allocation towards sustainable investments and the need to regulate ESG rating agencies. The negotiations in Europe are likely to involve (i) the choice for a regulation (verordening), (ii) the lack of methodical requirements and (iii) the exclusion of (raw) ESG data providers.

ESMA – ESG supervision of asset managers: SFDR, Taxonomy, AIFMD, UCITS Regulation
On 6 July, ESMA launched a common Supervisory Action (CSA) with National Competent Authorities (NCAs) on sustainability-related disclosure and sustainability risk integration. The CSA aims to examine supervised asset managers' compliance with relevant provisions of the SFDR, the Taxonomy Regulation and relevant implementing measures thereto, including the UCITS and AIFMD implementing acts on the integration of sustainability risks. Until Q3 2024, NCAs will undertake their supervisory activities and share knowledge and experiences through ESMA to foster supervisory convergence.

EU Taxonomy briefing: Environmental Delegated Act and amending Climate Delegated Act
On 5 July, the European Parliament published a briefing with an overview of the delegated acts supplementing the Taxonomy Regulation. It contains the Environmental Delegated Act, establishing the technical screening criteria for determining the conditions under which an economic activity qualifies as contributing substantially to the sustainable use and protection of water and marine resources, to the transition to a circular economy, to pollution prevention and control, or to the protection and restoration of biodiversity and ecosystems and the Disclosure Delegated Act as regards specific public disclosures for those economic activities. It further contains the Climate Delegated Act as regards the establishment of the technical screening criteria for determining the conditions under which an economic activity qualifies as contributing substantially to climate change mitigation or climate change adaptation.

The latest developments in litigation

Held v. Montana: state has active duty to realise right to clean and healthful environment
On 14 August, in a case brought by 16 young citizens of Montana against Montana, the District Court of Montana held that the children have ‘the right to a clean and healthful environment’ and the state has an affirmative duty to take active steps to realise this right. The District Court declared a legal limitation included in Montana's State Energy Policy Act which forbids Montana from considering the impacts of greenhouse gas emissions and climate change in their environmental reviews to be unconstitutional.

Climate litigation more than doubles in five years
On 27 July, the United Nations Environment Programme (UNEP) published the Global Climate Litigation Report: 2023 Status Review. The report gives an overview of the state of climate change litigation and an update on global climate change litigation trends. The findings demonstrate a rapid growth in climate change litigation worldwide: from 884 cases in 2017 to 1,550 cases in 2020 and 2,180 cases in 2022. The report predicts a rise in the number of cases dealing with, amongst others, climate migration, pre- and post-disaster conditions, transnational responsibility and vulnerable groups disproportionately affected by climate change.

ClientEarth appeals dismissal of climate risk mismanagement claim against Shell directors
In the June edition of ESG Matters, we reported that the English High Court dismissed environmental organisation ClientEarth’s claim against Shell Plc and its directors. In an oral hearing on 12 July, ClientEarth requested the court to reconsider this judgment. The London court upheld the dismissal by judgment of 24 July, whereupon ClientEarth announced that it will appeal this decision.

ClientEarth takes EU Commission to court for approving France’s agriculture plan
ClientEarth and Collectif Nourrir have brought proceedings against the European Commission before the Court of Justice of the European Union. The claimants argue that the European Commission has unlawfully approved a French national agriculture plan. They require the European Commission to reassess the plan and require France to improve it.

Greenpeace sues Dutch State for failure to protect nature against nitrogen damage
On 12 July, Greenpeace launched legal proceedings against the Dutch State on the reduction of nitrogen emissions. Greenpeace claims that the Dutch State commits an unlawful act by failing to reduce nitrogen deposition in natural habitats and the habitats of species in the short term and by failing to present a plan to sufficiently and timely reduce nitrogen emissions. The hearings are expected to take place in 2024.

Amsterdam Court of Appeal: flight-reduction Schiphol permitted
On 7 July, in preliminary relief proceedings, the Amsterdam Court of Appeal (nullifying the District Court’s judgement in first instance) held that the intended measures of the Dutch State to reduce the amount of flights around Schiphol do not violate EU law. The claimants (including the International Air Transport Association and KLM) have the opportunity to appeal in cassation against the judgment.

NautaDutilh's Sustainable Business & Climate Change team

Gaike Dalenoord | Partner Corporate M&A | Focus on chemicals and hydrogen

Frans van der Eerden | Partner Financial Law | Focus on financial regulatory and sustainability

Marieke Faber | Partner Dispute Resolution | Focus on climate litigation and sustainability strategy

Maartje Govaert | Partner Employment & Pensions | Focus on social pillar of ESG (employment law matters)

Harm Kerstholt | Partner Corporate M&A | Focus on energy, ESG due diligence and human rights

Iris Kieft | Partner Public & Regulatory | Focus on public regulatory, energy, climate change and the circular economy

Suzanne Kröner-Rosmalen | Counsel Corporate Governance | Focus on sustainable corporate governance, ESG disclosures and strategy

Geert Raaijmakers | Partner Corporate Governance | Focus on sustainable corporate governance

Arjan Scheltema | Partner Finance | Focus on green bonds, green covered bonds, green securitisations and energy efficient mortgages (hub)

Freerk Vermeulen | Partner Dispute Resolution and head of the Supreme Court Litigation team | Focus on climate litigation and sustainability strategy

Petra Zijp | Partner Capital Markets | Focus on green bonds and ESG-linked issuances

Editors: Kim Heesterbeek & Dorine Verheij