Recent Law Reforms in EU Sustainable Finance: Regulating Sustainability Risk and Sustainable Investments

Abstract

Responding to increasingly degrading environmental and social conditions, the European Commission has undertaken important legal and regulatory reforms to promote sustainable finance policy in Europe. However, these reforms have been numerous, complex, and fast-paced. They have proved difficult to grasp and contextualize, while exacerbating the intricacies of an already highly sophisticated EU legal and regulatory regime. This article outlines and examines such reforms with the purpose of providing necessary insights into the current state of EU law and policy in the area of sustainable finance. The first part of the article conceptualizes the meaning of sustainability risk and of sustainable investments. Understanding these two concepts is crucial as they underlie the entire reform process, from climate risk management to the development of sustainable markets and products. The second part of this article provides an overview and analysis of key sustainability-related reforms. Changes to the non-financial information disclosure regime are outlined covering the Corporate Sustainability Reporting Directive, the Sustainable Finance Disclosure Regulation, and the EU Taxonomy Regulation. Emphasis is placed on the ‘double materiality’ principle in sustainability reporting. Modifications to EU financial services law are also examined with focus on changes made to the Markets in Financial Instruments Directive (MiFID II), which is the central legislation governing securities regulation in Europe. Finally, a brief overview of the evolving prudent person rule contained in the Institutions for Occupational Retirement Provision Directive is offered. The article concludes by shedding light on key challenges afflicting reform implementation.

Keywords: sustainable finance, non-financial disclosure, sustainability risk, sustainable investments, MiFID II, investor protection, ESG, asset management, investment advice, corporate information disclosure, double materiality, fiduciary duty, prudent person rule

JEL Classification: G10, G18, G28, K10, K23, K32, K42, O16, Q01