Regulating For Double-Materiality Engagement Practices : A Review of the Existing EU Shareholder Engagement and Sustainable Finance Regime

Savva, Rafael (2024) Regulating For Double-Materiality Engagement Practices : A Review of the Existing EU Shareholder Engagement and Sustainable Finance Regime. In: UNSPECIFIED. (Unpublished)

Abstract

The European Commission’s revised Sustainable Finance Strategy aims to ensure that financial institutions will both secure their resilience to the risks posed by environmental degradation and contribute proportionately to sustainable development, based on the "double materiality" concept. Institutional shareholders' engagement practices fall within the scope of the Commission's policy and regulation for sustainable finance, and called for the review of engagement practices' main regulatory framework, the SRDII, to explore how it may better reflect its objectives. This paper examines the SRDII’s provisions dealing with engagement practices as they interact with sectoral regulation and the current sustainable finance framework to trace improvements in the area accordingly. Realising the undertaking of engagement practices consistent with double materiality requires addressing factors endogenous and exogenous to institutional shareholders’ decision-making leading to outcomes deviating from its standard or passivity. The frameworks collectively seek to address the majority of said factors by enhancing transparency, with an implicit normative expectation arising for engagement practices to at least address financially material ESG considerations aligned with clients’ and beneficiaries’ sustainable development preferences, if not their impact on sustainable development or advancing sustainable development. The paper is sceptical over transparency rules’ and the implicit normative expectation’s capacity to address the issues the factors generate on their own or promulgate the behavioural change needed for such engagement practices to transpire. If the EU is serious about seeing double-materiality-based engagement practices, robust regulatory intervention is needed. To this end, the paper suggests introducing engagement-related procedural rules and engagement practices’ explicit attention in sectoral regulation.