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Our Practice

Rimon’s environmental, social and governance (ESG) attorneys partner with clients to develop and implement custom ESG policies and strategies that are tailored to each client’s unique circumstances, balancing investment, operational and risk management goals. In a world where non-financial factors are impacting the bottom line of companies, it has become increasingly important that organizations are conscious of their environmental and social impact. Our attorneys develop custom ESG solutions which co-exist with the business and financial objectives of the client.

SELECTED EXPERIENCE

  • Advising private equity funds on strategic prioritization of policy and regulatory risk to integrate ESG factors into investment selection.
  • Advising investment advisers of hedge funds on ESG investment selection, criteria, due diligence and implementation and, there-after how to assess effectiveness of investment strategy.
  • Integrating ESG due diligence as part of traditional legal due diligence for mergers and acquisitions and venture capital transactions.
  • Developing custom, innovative structures for impact-focused platforms, dedicated impact funds, secondaries funds, co-invest funds, opportunity zone funds and other special investment vehicles that position clients to achieve both their financial goals and social purpose.
  • Representation of United Sustainability GmbH in relation to the creation of an impact investment fund for renewable energy, clean water, ecosystem restoration and other sustainable infrastructure projects.
  • Negotiating ESG, impact, climate, and other sustainable investment provisions in key corporate documents such as limited partnership agreements, private placement memoranda and side letters.
  • Representation of Kairos Investment Management Company in the formation of a $500 million evergreen fund to invest in Kimpact Fund I LP, a real estate impact investment fund focused on value added real estate with a social impact component.
  • Representation of ESG organizations in corporate transactions, including Calvert Social Investment Foundation, Inc. on the formation of, and placement of limited partnership interests in, Equity for Impact L.P. and ImpactAssets Funded Guarantee L.P., both Delaware limited partnerships.
  • Representation of investment management firms focused on emerging markets and impact investing in connection with the formation of a new fund.
  • Representation of fund managers in the creation of SPVs where carried interest distributions are determined in part by meeting quantified ESG goals.
  • Working with United Sustainability Valuation & Accounting GmbH in relation to modifying accounting standards so that companies will benefit from operating more sustainably (known as “integrated sustainability accounting”).

Notes on the European “Green Deal”

Since March 2021, new regulatory requirements for sustainability have gradually come into force. Among other things, they are implementing the European “Green Deal” and the “Sustainable Growth” action plan. The new set of rules will permanently change the real economy and the financial industry – its importance for the (entire) value chain cannot be underestimated. We present the new regulation here.

Harmonized disclosure

The core element of the reform is a harmonized sustainability disclosure. In the future, sustainability information will be increasingly communicated in more detail, especially in the distribution of financial instruments, in the context of the annual financial statements and through the allocation of “labels” (e.B. ECO Label or EU Green Bond Standard) with the aim of redirecting capital flows into sustainable investments and influencing the value chain.

The set of rules thus focuses primarily on economic incentives. In the future, for example, the lack of sustainability of financial products must be pointed out. Anyone who wants to advertise with the EU ECO label or the EU Green Bond Standard must be set up accordingly. As part of investment advice and financial portfolio management, institutions are obliged to enquire about the sustainability preferences of their clients.

Voluntary sustainability

The Taxonomy and Disclosure Ordinances do not create an obligation to operate sustainably – neither for the financial industry nor for the real economy. However, the new set of rules provides appropriate incentives – primarily through disclosure requirements.

Environmental sustainability

The Taxonomy Regulation concretizes the concept of environmental sustainability. Technical evaluation criteria will specify in detail when and to what extent an economic activity is actually “green”. This is to avoid”greenwashing”,i.e. the marketing of a financial product as environmentally friendly, although it does not meet basic environmental standards.

The Member States and the European Union can determine in which areas the concept of sustainability in the Taxonomy Regulation should apply. This is currently planned for the EU Green Bond Standard and the EU ECO Label, among others. Financial products that comply with the requirements of the Taxonomy Ordinance are also considered environmentally sustainable investments under Article 9 of the Disclosure Regulation. At the same time, companies are obliged to publish key figures on the environmental sustainability of their economic activities in their non-financial declarations.

In the future, however, several sustainability concepts will stand side by side. The Taxonomy Regulation defines the environmental sustainability of an economic activity in a comprehensive way, taking into account positive and negative effects of economic activities on environmental objectives. In this respect, the degree (percentage extent) to which an economic activity is ecologically sustainable is determined. The concept of sustainability in the Disclosure Regulation goes further: it also includes social sustainability, which can conflict with ecological sustainability. The Disclosure Regulation applies to sustainable and unsustainable financial products – each with different legal consequences. It differentiates different quality levels of sustainability.

Taxonomy Regulation

An economic activity is considered to be environmentally sustainable for the purposes of the Taxonomy Regulation if it makes a significant contribution to the achievement of one or more environmental objectives, does not lead to a significant impairment of one or more environmental objectives, is exercised in compliance with the minimum level of protection and meets technical assessment criteria.

The Taxonomy Regulation recognizes the following environmental objectives:

  • Climate protection
  • Adaptation to climate change
  • Sustainable use and protection of water and marine resources
  • Transition to a circular economy
  • Pollution prevention and control
  • Protection and restoration of biodiversity and ecosystems
  • Bids and Disclosure

Sustainability is more of a “commandment” than a “prohibition.” The importance of the sustainability regime primarily follows from an expected economic pressure on issuers and market participants. The primary means of setting incentives is the disclosure of sustainability information.

For more information on Taxonomy Regulation, click here.

Sustainable financial products

The Sustainable Finance Disclosure Regulation (SFDR) regulates the distribution of financial products. Obliged entities are financial market participants and financial advisors. It applies only to the products defined in the Regulation and does not claim to create transparency rules for all financial instruments across all distribution channels. Unlike the Taxonomy Regulation, the real economy is not within scope. Non-financial companies are therefore only covered by the Taxonomy Regulation.

The Disclosure Regulation obliges financial market participants and advisors to disclose sustainability information in the distribution of financial products. A distinction is made according to the type of services provided and the financial product. A distinction must be made between disclosure at product level and company level. The former is typically done through pre-contractual information. The latter via the Internet. The Federal Financial Supervisory Authority (BaFin) has compiled the complex regime of disclosure obligations, along with transitional provisions and exceptions, in tabular form for the market. The document can be here (external link, as of July 2021).

From 2022, customers must be expressly informed in pre-contractual information whether a financial product is ecologically sustainable within the meaning of the Taxonomy Regulation. This is no longer the case even if the minimum level of protection under the Taxonomy Regulation is not complied with. In addition, the Disclosure Regulation introduces a regular reporting obligation for financial market participants on sustainable investments and products. Reporting is ex-post reporting: it serves to disclose whether the objectives pursued with a financial product have actually been achieved.

Financial

The Disclosure Regulation applies to sustainable and unsustainable financial products – but differentiates in its legal consequences. A distinction must be made between products aimed at sustainable investments, products that are advertised with, among other things, ecological or social characteristics, and other products.

Summary

The Disclosure and Taxonomy Regulations should not be underestimated in their interactions and effects. They influence the entire value chain. In the future, issuers will demonstrate the sustainability of their economic activities – including the necessary key figures. The supply and demand for financial instruments will come together again – also against the background that the market for 100 percent sustainable financial products will initially be very narrow.

The new regime comes into force successively. The Disclosure Regulation has been in force since March 2021, with the exception of some provisions that will not enter into force until 2022 together with the Taxonomy Regulation for the environmental objectives of environmental protection and climate change. For all other environmental objectives, the rules will apply from 2023. In parallel, work is underway on regulatory technical standards and assessment criteria, which are also expected to be adopted with their own transitional provisions.

Update:

By letter of 8 July 2021, the European Commission stated that it would merge all RTS on the Disclosure Regulation into a consolidated version and, contrary to what was originally planned, not bring it into force on 1 January 2022, but only on 1 July 2022.

Note: This article does not constitute legal advice and cannot replace it.

Rimon Attorneys With Expertise in Environmental, Social and Governance Include: