Sustainability in the finance industry

Sustainable Finance

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Sustainable finance: Invest sustainably, profit sustainably.

With its Sustainable Finance Action Plan and the EU Commission’s new Sustainable Finance Strategy, the EU has created regulatory standards for a sustainable European financial system that are the only ones of their kind in the world. In addition to new disclosure requirements under the Sustainable Finance Disclosure Regulation (SFDR), a classification system – a “green” taxonomy – for various financial market participants (such as asset managers, fund managers, and investment advisers) and their products with respect to “environmentally sustainable” investments has been developed under the Taxonomy Regulation. Not only is this pertinent for (nearly) all parties in the financial market, it also primarily affects goods and services.

The new legal requirements have been entering into force incrementally since the start of 2021, particularly making adjustments necessary for the affected financial market participants and their products with respect to business and risk strategy, remuneration policy, risk management systems, reporting, and data management. Parallel to this – by no later than autumn 2022 – it will be obligatory to ask investors whether and to what extent sustainability is prioritised in their investment objectives. In short: Sustainable investment is growing in importance.

Our 360-degree approach delivers comprehensive solutions in sustainable finance for products and companies alike by leveraging our many years of experience, deep sector knowledge, and consulting via interdisciplinary teams.

ESG pays for itself – particularly in the field of real estate. In future, stricter sustainability criteria will apply to project developers, asset managers and those who manage funds and portfolios. If you take action now and align your properties and contracts accordingly, you will generate better profits. We’ll be delighted to help.

Dr Christoph Strelczyk, lawyer
Dr. Christoph Strelczyk, Rechtsanwalt bei GSK Stockmann

SFDR applicability dates

The key measures under the EU Sustainable Finance Action Plan and the EU Commission’s current Sustainable Finance Strategy include in particular the Sustainable Finance Disclosure Regulation (SFDR), the Taxonomy Regulation, and the integration of sustainability preferences into the MiFID II regime.

The SFDR regulates sustainability-related disclosure requirements for financial products and applies to nearly all financial market participants. Central to this regulatory framework is the distinction drawn between three pillars

  • Addressing sustainability risks,
  • Principal adverse impacts (PAI),
  • andProduct categories.

The regulation has largely been applicable since 10 March 2021. The exact requirements with regard to the respective disclosure obligations, the so-called Regulatory Technical Standards (RTS), are currently being developed and will take effect as delegated acts at various points in time depending on the respective disclosure obligation.

The graphic below shows the various dates at which the SFDR comes into effect with reference to the Taxonomy Regulation, the MiFID II regulations as well as the planned Corporate Sustainability Reporting Directive (CSRD).

In der nachfolgenden Graphik werden die unterschiedlichen Anwendbarkeitszeitpunkte der SFDR mit den Bezügen zur Taxonomie-VO sowie der MiFID II-Regelungen veranschaulicht.

Sustainable Finance Infographic

Companies have been proclaiming their commitment to sustainability for some time now – although so far the term has been open to interpretation. Now, for the first time, there are clear and binding rules in the EU. In future, “sustainability” will have to be classified according to these regulatory requirements in each individual case.

Lisa Watermann, lawyer
Lisa Watermann, Rechtsanwältin bei GSK Stockmann

Sustainable Finance strategy: We support financial market players as they move towards sustainability.

In the European Union, the question is no longer whether, but how to regulate the field of sustainable finance. Regulation poses immense challenges to the real economy and the financial industry while simultaneously opening the door to a whole new world of opportunities – because sustainable investments means sustainable profits. With investor interest in sustainable options likely to increase, financial market participants who offer a timely and holistic sustainability strategy can potentially benefit from this growing investor base.

Our team here at GSK Stockmann will support and advise you on strategic, efficient and sustainable solutions for all relevant aspects of sustainable finance. Specific areas we can help you with include:

  • Developing a compliant corporate strategy (with a primary focus on business strategy & risk strategy)
  • Developing an implementation strategy and a meaningful catalogue of measures to meet regulatory requirements and transparency obligations
  • Setting up ESG funds / impact funds
  • Green bonds and green finance
  • ESG compliance or ESG-compliant real estate projects
Oliver Glück, Rechtsanwalt bei GSK Stockmann

The introduction of the EU’s regulatory framework for sustainable finance has catapulted sustainability to a new level. The focus is no longer solely on political goals, but also on legal requirements. Not all sustainability is created equal any more.

Dr Oliver Glück, lawyer

Your challenges – our solutions.

Our solutions in the field of sustainable finance build on GSK Stockmann’s 360° approach. Our teams in Germany and Luxembourg offer investors, companies and financial market participants comprehensive legal advice on all aspects of sustainability. By integrating sustainability criteria in a strategic manner, you can minimise financial risks resulting from climate change, depleted resources, environmental destruction and social factors.

ESG has now arrived in the midst of economic life and will be one of the key drivers of legal requirements in the financial sector, but also in the real economy and corporate policy in the coming years. ESG is both a legal frontier and a driver of innovation in the world of tomorrow.

Philippe Lorenz, lawyer

ESG: The three factors of sustainability

The market for sustainable investments is booming. ESG – which is short for environmental, social and (corporate) governance – refers to basic criteria for sustainable investments that take environmental protection, social concerns and good corporate governance into account. Since 2017, ESG criteria have been included in the annual sustainability reports of publicly listed companies, in certifications and ESG scores.

Rating agencies and independent experts can verify the details for banks, funds and investors. Good, sound advice is absolutely indispensable in order to comply with the numerous regulatory requirements.

In der nachfolgenden Graphik werden die unterschiedlichen Anwendbarkeitszeitpunkte der SFDR mit den Bezügen zur Taxonomie-VO sowie der MiFID II-Regelungen veranschaulicht.

The E in ESG stands for environmental. It refers to measures that are taken to reduce one’s carbon footprint. These will include strategies for protecting the climate, using renewable energy, using resources more mindfully and minimising airborne and water emissions. In the case of real estate, for example, you can increase the value of a building by improving its energy efficiency or transport links. Debates about the effects of climate change and the countermeasures required have increasingly made ecological concerns the focus of discussions surrounding sustainability.

The S in ESG stands for social. It embraces all social aspects of an investment and accounts for factors such as employee rights, occupational health and safety, fair pay, the right of assembly and the right to join a trade union. Further down the supply chain, supply chain laws also regulate sustainability standards for suppliers. In cases where social factors are an acquisition criterium, real estate such as nurseries and care homes may be able to command higher prices or generate higher profits. Conversely, social and ethical factors can have a negative impact on the productivity of a company or the value of an asset. Innovative risk minimisation instruments are required in order to calculate the associated risks. The considerable societal strains caused by the coronavirus pandemic as well as legal regulations such as the German Supply Chain Act have triggered a renewed interest in social standards among investors.

The G in ESG stands for governance. This refers to all measures associated with good corporate governance, including good supervisory structures, compliance, company ethics, shareholder rights, transparency, effective risk management and measures to combat corruption. All these aspects are included in the sustainability report and hence in the company rating. Infractions such as bribery and corruption count as violations against ESG criteria and may prevent a venture from being included in a sustainable investment portfolio.

Frequently asked questions about sustainable finance and ESG

Sustainable finance generally refers to the principle of sustainability in the financial system. The aim is to have sustainability factors and considerations, in particular the so-called ESG criteria, incorporated into the decision-making and investment processes among financial market participants. Sustainable finance has gained a great deal of momentum in business and finance in the past 10 years, not least due to the Paris Climate Agreement, the UN Sustainable Development Goals (SDGs), and the EU Sustainable Finance Action Plan.

The EU Sustainable Finance Action Plan was published by the EU Commission in 2018. It spells out ten measures for rendering the European economic and financial system more stable, crisis-resistant, and sustainable. The goal is to leverage these individual measures to redirect financial flows. At the heart of the Action Plan’s measures are the Taxonomy Regulation and the Sustainable Finance Disclosure Regulation (SFDR). Additionally, the Action Plan has a particular focus on integrating ESG criteria into legal acts for the MiFID II Directive, AIFM Directive, UCITS Directive, IDD, and Solvency II.ration von ESG-Kriterien in die Rechtsakte zur MiFID II-Richtlinie, AIFM-Richtlinie, OGAW-Richtlinie sowie IDD und Solvency II.

The Federal Government established its Sustainable Finance Committee in mid-2019 for the duration of the 19th Legislative Term. Based on the Committee’s final report from early 2021, the previous federal government developed a sustainable finance strategy. Under the coalition agreement, the new federal government has resolved that the Committee’s work shall be continued on a permanent basis in the form of a new expert committee.

The Federal Cabinet adopted the German Sustainable Finance Strategy in May 2021. Its primary objective is to make Germany a leader in sustainable finance. The key points are:

  1. To promote sustainable finance at the European and global level,
  2. To tap into opportunities, facilitate financing for transformation, and anchor sustainability impact,
  3. To improve risk management in the financial industry in a targeted manner and ensure financial market stability,
  4. To strengthen Germany as a financial centre and expand upon the expertise found here, and
  5. To establish the Federal Republic as a role model for sustainable finance in the financial system.

The strategy features 26 concrete measures to implement these goals.

The Disclosure Regulation (EU) 2019/2088, also known as the Sustainable Finance Disclosure Regulation (SFDR), governs the requirements for financial market participants and financial advisers when disclosing information regarding the sustainability of a financial product. The Disclosure Regulation differentiates between disclosures at the company level and product level on the one hand; and the various communication media of website, pre-contractual information, and regular reporting on the other. The underlying foundation of the Disclosure Regulation stands on three main pillars:

  1. Addressing sustainability risks
  2. Significant adverse sustainability impacts
  3. Product categories

The various product categories define varying degrees of disclosure obligations with regard to sustainability criteria, which are:

  • Non-sustainable funds
  • ESG strategy funds (so-called Art. 8 products)
  • Impact funds (so-called Art. 9 products)

The Disclosure Regulation is part of the EU Sustainable Finance Action Plan and plays a central role in transforming the EU economy and financial system toward more sustainability.

The Disclosure Regulation affects (nearly) all financial market participants and financial advisers.

Directive 2011/61/EU on alternative investment fund managers (AIFM) sets out common requirements for the authorisation and oversight of AIF managers. AIFs are investment funds which do not fall under the scope of the UCITS Directive 2009/65/EC, in particular hedge funds, private equity funds, and real estate funds. The AIFM Directive merely regulates AIF managers, not AIFs themselves.

A financial product will be ESG-compliant if it takes into account so-called ESG criteria as part of its investment strategy. These criteria pertain to the fields of environment, social, and governance. Under the EU Sustainability Finance Disclosure Regulation (SFDR), a financial product must comply with the requirements laid out in the SFDR if it is to be considered ESG-compliant.

ESG criteria describe criteria in the fields of environment (E – environmental), social (S – social), and corporate governance (G – governance).
Examples of ESG criteria:

  • Environment: Climate change, greenhouse gas emissions, resource depletion, waste, pollution
  • Social: Working conditions, including slavery and child labour; equal pay, diversity
  • Corporate governance: Bribery, corruption, fair tax strategy, executive remuneration

Directive 2014/65/EU on markets in financial instruments (MiFID II) is the successor to MiFID I Directive 2004/39/EC, and has been implemented into German law along with the associated MiFIR Regulation (EU) 2014/600 (Markets in Financial Instruments Regulation) with effect as per 3 Jan 2018. MiFID I primarily concerns requirements on the management and organisation of investment firms, admission requirements for regulated markets, a regulatory reporting system to prevent market abuse, transparency obligations in stock trading, and regulations for admitting financial instruments to trading. The revision of MiFID I led to the adoption of MiFID II in 2014, which was intended to render financial markets more efficient and resilient and to harmonise conditions in the markets. MiFID II/MiFIR significantly expanded the Directive’s scope of application. They particularly introduced pre- and post-trade transparency requirements for non-equity instruments; a new category of trading platforms for derivatives and bonds, so-called organised trading facilities (OTF); and a trading obligation for stock on regulated marketplaces. Moreover, measures have been introduced to improve investor protection and to strengthen regulatory oversight and cooperation among the national supervisory authorities in Europe.

Under MiFID II, ESG factors were integrated in the product governance guidelines and the wording on suitability was amended.

  1. Product governance guidelines
    Under the regulations, it must in future be declared in detail to the target market which client groups the product is targeted at and with which sustainability-related objectives the product is to be marketed. In addition, sustainability factors need to be taken into account in the product approval process and should be presented in a transparent manner when marketing the product. Firms are to ensure this through appropriate product governance.
  2. Suitability
    Investment advisers need to enquire about clients’ sustainability preferences and integrate these into the suitability test and recommendation (where relevant).

These rules are applicable from mid- to late 2022.

The EU Taxonomy Regulation (EU) 2020/852 lays out a classification system, the so-called taxonomy, to specify the conditions that a financial product must meet in order to be designated as ecologically sustainable. The Taxonomy Regulation does not have mandatory criteria for financial products, but merely establishes regulations for some products, such as those designated by issuers as being “sustainable” or “green”. The primary objective here is to avoid so-called greenwashing. Under the Taxonomy Regulation, a financial product will be ecologically sustainable if it

  • contributes to one or more of the environmental objectives set out in the Regulation,
  • does not significantly harm any of the other environmental objectives (so-called do no significant harm principle),
  • complies with the minimum social guarantees described in the Regulation, and
  • meets the technical evaluation criteria stipulated by the EU Commission.

The Taxonomy Regulation is at the heart of the EU Sustainable Finance Action Plan.

Sustainability at GSK: Creating change together.

Sustainability is an essential component of our daily actions and future planning. The views and commitment of our employees are just as important to us as the input from our clients and external stakeholders.

Find out in our sustainability report for financial year 2021 how our firm lives out the principles of sustainability in all its many facets.

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More than just lawyers.
We are your partners.

Entrepreneurial initiative and the spirit of partnership are written into our DNA of our law firm. Coupled with our professional expertise, these form the basis for the sustainable advice we offer and are the key to your success. We take partnership literally: as your trustworthy partner, we will look after you and your company’s interests. We understand your economic goals – and we work proactively and creatively to promote them to the fullest extent possible. In short, we take responsibility and make it our business to look after your business as if it were our own.

We support you on your journey towards sustainability. 

Arrange an appointment now – our team looks forward to hearing from you.

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