This is accompanied by a flood of European ESG regulations. “What started as another regulatory requirement has become an important intrinsic part of our clients’ strategy.”
Michaëla Ulrici leads NautaDutilh’s Financial Sector team, and frequently speaks to our financial clients on the broad spectrum of ESG challenges. “All our clients set the bar high, while they struggle with regulatory ambiguity and limited availability of data on sustainability risks. Financial clients require information on ESG performance from their clients or investments, but much information at the investment level is simply not available, or at least not yet. The combination of standards not yet being set and unambiguous definitions has made this a challenge these past years, and I am afraid this will not drastically change any time soon. Moreover, the urgent need to be compliant can run counter to the impact financial institutions would like to make.”
Playing safe can hold us back
“The clients I meet with see the need to maximise their impact as much as possible, but also feel the constraints. If you can be held liable for setting goals which later on appear to have been too ambitious, playing safe becomes the default option. Good governance means taking into account all potential reputational and litigation risks. Financial institutions are balancing a number of themes that require their urgent attention: sustainability and ethical dilemmas, as well as increasing regulatory and administrative obligations and the consequences of ever-expanding digitalisation. So I understand the boards’ dilemmas as they have responsibilities vis-à-vis all stakeholders. At the same time, I personally feel we can’t be ambitious enough when it comes to ESG. It sometimes feels like an impossible split. In the end, we all lose as a society when we risk to miss out on the ‘explore, try and fail and try again’ processes that are needed to stop climate change and meet the Paris goals.
What I sometimes find even more frustrating, is that regulations do not necessarily have the best effects. For example, in case of residential mortgage lending, a bank gets a better regulatory capital treatment if it supports a consumer to get from energy label B to A. This is an excellent incentive. However, there is no reward for supporting the home owner to improve from energy label F to B, which would of course have a larger impact in terms of sustainability. It may simply not be possible to get an old house to A, but getting to B already is a great step forward. Unfortunately, it’s not easy or straightforward to get this changed at European Union level. We are now missing out on these opportunities, which are sometimes even lowhanging fruit. Getting to the best results for our future requires all carrots and sticks available.”
Shaping the path together
“NautaDutilh advises the financial sector across the board, and has experience and insights across the entire spectrum of ESG topics,” Michaëla stresses. “We include the ESG perspective in all areas of law which we practice. Whereas ESG started as a niche topic, it is now part of every counsel’s toolbox. As it should be. Given that this area of law is still developing and not much is set in stone yet, we have established a multidisciplinary team of top experts. We feel that an interdisciplinary look in this phase is the best possible approach, and allows to take the continuous change into account. The continuouschange also makes that we work closely together with the legal teams and the business to exchange views and experiences and to explore the best solutions. All joints and bolts must fit: the regulations, the supervisory framework, and the execution. It is a joint effort to implement the complex and sometimes ambiguous regulations and guidelines, and to pave the way for bringing about changes.
Within our firm, we constantly deepen and broaden our ESG expertise. Our clients expect us to be on top of things, but also accept that we cannot always provide ready-made solutions on ESG. They expect consistent high quality, and at the same time experience this as a shared journey wherein it is good to explore with each other regularly This makes our work extra fun, because even more than usual, we form a team with our clients. A team that gets the wheel turning and shapes the path together in an environment where a lot is still unclear.”
Climate commitment
Michaëla notes that for financial institutions, balancing climate commitment with core functions such as providing access to the capital market can be challenging. “Legally, saying goodbye to certain clients as part of the ESG policy is not always possible. Our interdisciplinary teams spar with clients on all aspects of such issues. This ranges from one-on-one discussions to round tables. We also work together with our clients on ‘pre-lawyering’: what can you do today to prevent potential issues tomorrow? Of course, clients have differences in focus, and there are different speeds, depending on the size, strategy and client base of the institution. The areas in which momentum is or can be gained vary from one bank to another. For certain banks, ESG is a more prominent element of their strategy. Nevertheless, we see little difference in the intensity with which financial institutions are working on ESG challenges.”
Greenwashing
“An important part of our work is to help clients shape their sustainable ambitions without increasing litigation risks. Greenwashing cases will surely emerge in the Netherlands: the question is not ‘if’, but ‘when’ – and ‘how many’. As the legal landscape continues to change and ambitions are set, litigators who provide their experience and insights in the latest developments have become core members of our team.”
Potentially impactful regulations concerning due diligence and chain liability are also on the horizon. The European Corporate Sustainability Due Diligence Directive (CSDDD) forces companies to take measures to reduce or eliminate the negative impact of their activities on human rights and the environment. This raises questions such as: what requirements should fund managers set for their investments?”
Taking responsibility
‘Raising the bar’ is a theme that Michaëla finds eminently applicable to the ESG transition in the financial sector. “The sector has accepted the challenge and shown its willingness to take responsibility for driving the sustainable transition. The focus on the ‘S’ in ESG – think of topics such as human rights, diversity and inclusion – is increasing as well. Especially in an uncertain and constantly changing playing field, we consider it key to continue to deliver a high level of quality across all our teams, which are more interconnected than ever. It goes without saying that this includes investing, together with our clients, in shaping ESG policy and what this means in practice.”
The Sustainable Finance Disclosure Regulation (SFDR) should make it easier for investors to find their way around the extensive range of sustainable products on offer. “It is not yet fully clear what constitutes a sustainable investment under the SFDR, and this complicates the implementation of these disclosure rules,” Michaëla thinks. “Being too ambitious can have far-reaching consequences. We see that many financial market participants now choose for the Article 8 or ‘light green’ option, though they already meet or largely meet the strictest social and sustainability requirements for Article 9 or ‘dark green’ classification.
Potentially impactful regulations concerning due diligence and chain liability are also on the horizon. The European Corporate Sustainability Due Diligence Directive (CSDDD) forces companies to take measures to reduce or eliminate the negative impact of their activities on human rights and the environment. This raises questions such as: what requirements should fund managers set for their investments?”