The term 'sustainability' has outgrown its status of being a mere buzzword. Climate change has given the starting signal of a relay race in which the United Nations has given the baton to the European Commission who has passed it on to the Member States. Several EU countries, including Belgium, have taken a proactive approach. Meanwhile, different international associations also come forth with various sustainable principles. In this article, we intend to provide a comprehensive overview of the different layers of sustainable initiatives, especially in respect of the other buzzword: sustainable finance.
Sustainable finance on the EU agenda
In the viewpoint the European legislator, sustainable finance is generally understood to be "the process of taking due account of environmental and social considerations in investment decision-making, leading to increased investments in longer-term and sustainable activities". It is believed that investors are left unguided in their search of what constitutes (or does not constitute) a sustainable financial product. This observation has led to a legislative proposal for a regulation on the establishment of a framework to facilitate sustainable investment. The proposal aims at the creation of a "EU taxonomy": as a unified EU classification system, this taxonomy would function as an explanatory tool for investors to make an informed investment decision. The taxonomy is expected to take effect in 2021.
The plea for sustainability has also triggered adaptions to existing legislation: the European Securities and Market Authority (ESMA), for one, has issued technical advice on the integration of sustainability risks and factors in the Markets in Financial Instruments Directive II (MiFID II). It is clear that sustainable finance has drawn the attention at supranational level. Similarly, the European Insurance and Occupational Pensions Authority (EIOPA) has reflected on the impact of sustainability considerations on Solvency II and the Insurance Distribution Directive (IDD). By 2025, the European Banking Authority (EBA) has to do the same exercise in respect of the Capital Requirements Regulation (CRR) II.
Other pieces of legislation that may be affected are the Undertakings for the Collective Investment in Transferable Securities (UCITS) Directive and the Alternative Investment Funds Manager Directive (AIFMD). It is highly likely that many more initiatives are on the horizon, as the future European Commission will put sustainable finance at the top of its list.
Sustainable finance on the Belgian agenda
Also at national level, sustainable finance has not passed by unnoticed. A report issued by MIRA ('Milieurapport' Vlaanderen) reveals that the range and volume of 'sustainable investments' are growing notably in Belgium. To further facilitate the investors' appetite for sustainable financial products, several initiatives have been taken. Two are noteworthy.
On the one hand, Febelfin – the Belgian federation of the financial sector –has fabricated a 'quality standard for sustainable and socially responsible financial products'. By also looking at criteria such as corporate governance and social policy, Febelfin's standard takes a broader view than its European counterpart. The federation sees its own quality standard as a minimum: distributors and product managers are prompted to act pro-actively and to go beyond the minimal requirements.
On the other hand, a bill has recently been filed. The bill proposes to adjust the Belgian Law of 19 April 2014 on alternative investment funds and their managers in terms of enabling investors' access to so-called impact-investing funds. Impact-investing funds grant financing to/participate in undertakings and organisations established in developing countries for the purpose of effecting financial profitability while also having a positive social and/or environmental impact. The bill largely retakes a bill drafted and filed in 2018. Both versions lower the minimum amount for investments within the scope of a private placement from EUR 250,000 to EUR 10,000.
As sustainable finance seems to occupy many agendas at present, chances may be higher that the bill successfully passes all relevant legislative stages, with a coalition of the willing in Parliament.
Sustainable finance on other agendas
On the road towards sustainable finance, one comes across many more initiatives worth lingering about. The Loan Market Association (LMA) together with the Asia Pacific Loan Market Association (APLMA) and the Loan Syndications and Trading Association (SLTA) have recently issued 'Sustainability Linked Loan Principles' (SLLP). In 2018, this trident of associations also issued the Green Loan Principles (GLP). Equally interesting are the Green Bond Principles published by the International Capital Market Association in 2014, which were updated in 2018. Older, but still relevant, are the Equator Principles. Launched in 2003 they are still used as a benchmark in many project financings. These initiatives show that sustainable finance is a topical issue of high importance leaving no agenda untouched.
Sustainable finance on your agenda
Over the last few years, both the demand for and the offerings of services relating to sustainable finance have increased. An increasing pressure to be up to speed with the latest developments is experienced. Financial institutions and asset managers, insurance companies, and funds search for methods to incorporate sustainability in their business operations and processes, in order to continuously meet the most recent criteria. At Loyens & Loeff, we assist clients with mapping out their tailor-made routes towards sustainable finance.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.