A Sustainability Crisis Makes Bad Law! - Towards Sandbox Thinking in EU Sustainable Finance Law and Regulation -

Abstract

Focusing on UCITS management companies and managers of alternative investment funds, we analyze the state of EU sustainability-oriented financial law and its implementation. In the course of doing so, we find many reasons for concern. Given the Sustainable Finance Action Plan (SFAP) and its follow-up Sustainable Finance Strategy of 2021 responding to a sustainability crisis, we can testify to the old lawyers’ adage that ‘crises make bad laws.’

We have identified the main challenges that could hinder the completion, or effective implementation, of Europe’s sustainable finance agenda as: (1) a data gap; (2) a lack of recognized models linking financial and sustainability data; (3) a lack of human resources with sustainability skills; (4) a costly taxonomy approach, suffering from gaps in crucial parts of the legislation while being too detailed in others; (5) legal uncertainty; and (6) national fragmentation emerging from Member States’ gold-plating.

We argue that many deficiencies could be overcome by so-called sandbox thinking (a mutual learning approach where supervisors and the financial industry jointly seek good solutions to the challenges associated with innovative sustainable finance law and regulation). For that purpose, regulators and supervisors should establish a phase-in period where both proportionality and an open view as to what is feasible and reasonable are held paramount in day-to-day operations and their supervision.

The paper is structured as follows: Part I provides an introduction; Part II overviews the EU’s cross-sectoral sustainable finance agenda; Part III looks at the particularities of sectoral legislation for investment funds and investment fund managers; Part IV lists the pain points of the EU’s sustainable finance agenda for fund managers while outlining policy considerations for how best to address these issues; and Part V concludes that, in light of the challenges, a ‘sandbox thinking’ focused on mutual learning would enable the sustainability transformation of the EU’s financial sector.

Keywords: Sustainable Finance, Financial Regulation, Data, (revised) Sustainable Finance Strategy 2021, EU Green Deal, Investment Funds, UCITS, AIFM