Green Banking and Green Central Banking by Andreas Dombret

Author:Andreas Dombret
Language: eng
Format: epub
Publisher: De Gruyter
Published: 2021-09-27T07:54:36.376000+00:00

5.3 The SDFR and the Brussels Effect

The EU has another card up its sleeve. Its rules on sustainability apply not only to EU issuers, but also to any financial advisor which sells or advises on financial products sold in the EU under the Sustainable Financial Disclosure Regulation (SDFR). The SDFR applies from March 10, 2021 and requires disclosure both at the firm and at the product level from any international fund manager active in the EU in compliance with EU categories, including the Taxonomy.

This can be seen as a variation on the GDPR strategy of catching the big international fish and requiring them to play by local rules if they want to stay in the pond. Once their systems are in place to comply with the Taxonomy, the financial intermediaries can become allies in its propagation beyond the EU’s borders. This can be analysed as a manifestation of what Professor Bradford has termed the Brussels Effect in her brilliant book of the same name. The theory is that the EU through its own standard setting in certain areas, including privacy and environmental protection, can influence conduct worldwide through decisions of the private sector where access to the EU market is important and can be controlled and a single set of standards worldwide is easier than trying to administer separate standards. This is in particular the case where the rules apply to inelastic targets such as consumers rather than more mobile targets such as capital and the product or service is indivisible, legally, technically or economically.

The Brussels Effect worked with the platform operators in the privacy sphere, but a close examination of Professor Bradford’s criteria for its effectiveness would lead to a number of doubts as to its applications to standard setting in the sustainability area. One difference is particularly important for me. In privacy, the decision was solely in the hands of the platforms to adapt their policies to comply or not. In sustainability, the financial intermediaries are dependent on the companies they invest in to provide them the needed information on their operations outside the EU. The intermediaries will clearly be incentivized to do so since, if they are unable to classify an investment as Taxonomy compliant, this will negatively affect the green rating of their own products and portfolios which include the asset. The effects on the intermediaries may be even greater if they are called upon to include the effects of their portfolios as part of their own “Scope 3” reporting, as the recent CDP Financial Services Disclosure Report 2020 suggests they ought to do. Whether companies outside the EU can be convinced to report along the lines of the Taxonomy will depend on how difficult that reporting is and whether a broadly accepted alternative system is available, which might be more user-friendly. We have seen that the Taxonomy contains a novel approach, requiring the collection of information customized to EU climate policies, which non-EU companies may be hesitant to start generating.

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