FEATURE | Q&A
ESG a challenge for EU structured products manufacturers The European market for structured products faces a new challenge in the wake of the new ESG regulation, according to law firm Mayer Brown.
According to Scholl, structured products and derivatives can play a relevant role in the transition towards a green economy and sustainable finance but there needs to be more clarity about what makes a product ESG, how the three elements – issuer and taxonomy alignment, green, taxonomy aligned underlyings, the use of proceeds to support taxonomy aligned ESG projects/activities - count towards a structured products KPI. Under the amended Mifid 2 Delegated Regulation, investment advisers will be required to ask investors about their sustainability preferences. This development is accompanied by the discussion about a sustainability traffic light system like the one suggested in Germany and the EU Ecolabel for retail structured products.
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he implementation of the EU Taxonomy Regulation in the upcoming years will make more data available to market participants about the sustainability of major companies in the EU. Moreover, a new EU Green Bond framework will create a gold standard for issuances with a specific environmental use of proceeds, according to the law firm. Under the EU Disclosure Regulation, financial market participants such as investment funds and financial advisers such as credit institutions and investment firms are already required to provide certain sustainability disclosures. The EU Benchmark Regulation also provides the basis for EU Climate Transition Benchmarks and EU Paris-aligned Benchmarks. “There's uncertainty as to what regulators think about how ESG products should be structured, as well as investor preferences and certain sustainability aspects,” said Patrick Scholl, partner and head of Mayer Brown's Banking & Finance practice in Germany. “A few weeks ago, the market seemed to have a clear view about nuclear power, coal and gas, and now we’re wondering how ESG will look if the military and defence industry becomes more important for the Western world.”
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"It is important that investors understand what they are investing in and the lack of guidance is a risk,” said Scholl. “The market needs transparency and uniformity and a harmonised standard methodology of what is sustainable and green. “Some issuers and distributors are not getting involved in ESG because of the currently still quickly assumed greenwashing element and the reputational risk.” As structured products are not covered by the EU Disclosure Regulation, there is currently no regulatory framework directly applicable to such products and no regulatory guidance on the features of a structured product that would qualify a product as a ‘sustainable structured product’ with legal certainty for product manufacturers. “There are many legal uncertainties for manufacturers when it comes to structuring sustainable structured products,” said Scholl. “At the moment, product manufacturers face the issue of developing their own methodology, and this is not good for the market, and it will not work going forward.” ROLE OF DERIVATIVES In connection with the discussion about the further implementation steps for the EU Taxonomy Regulation and the EU Disclosure Regulation, the EU Commission has not yet acknowledged an enabling effect of derivative instruments on sustainability goals.
