EU Sustainable Finance: Complex Rules and Compliance Problems

Abstract

Recent law reforms in EU sustainable finance have produced countless new regulations and legal requirements. This article claims that these new sustainable finance rules are often complex rules that pose serious compliance problems. At the start of this article, features adding complexity to a rule are considered including density, granularity, technicality, cross-referencing, difficult determinations, and functional dependence. After conceptualising rule complexity, the article turns to identify this phenomenon in EU sustainable finance rules. Complexity is first identified in MiFID II rules covering the legal definition of sustainability preferences and the suitability requirements applicable to asset managers and investment advisors. A more general analysis follows that looks at complex rules in the wider spectrum of EU sustainable finance reforms.

The rest of the article concentrates on the implications of rule complexity for compliance. Although there are good reasons for rule design to incorporate complex features, complex rules have been found to promote noncompliance. The underlying rationale, supported by this article, is that complex rules amplify the compliance burdens faced by companies, including cognitive, operational and system problems of compliance. These problems are examined by reference to scholarship and utilised to discuss the compliance obstacles observed during the implementation of the Sustainable Finance Disclosure Regulation.

Although both economic and normative motivations for noncompliance are acknowledged, this article emphasizes on noncompliance situations that occur in the context of companies that, albeit willing to obey the law, find themselves anyway in breach of law due to internal problems such as mistakes, confusion, misinterpretation, mismanagement, or dependence. Complex rules, this article claims, tend to exacerbate this type of compliance problems, a fact that confronts regulators with new challenges in their quest to ensure rule compliance. Paths for future research are identified in a setting where regulators are required to effectively deal with the reality of complex sustainable finance rules.

Keywords: sustainable finance, regulatory compliance, complex legal rules, MiFID II, SFDR, non-financial disclosure, sustainable investments, investor protection, asset management, investment advice, law enforcement, ESG

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