On 13 March 2023, the Dutch Minister of Finance (the Minister) published a letter on the progress of the climate commitment of the financial sector (the Letter). In 2019, banks, pension funds, insurers and asset managers committed to contribute to the implementation of the Paris Climate Agreement and the Dutch Climate Agreement. The starting point for this commitment was for financial institutions to publish action plans in 2022. In the Letter, the Minister reviews the action plans, assesses their quality and provides for next steps in the process of this commitment.
The Minister states that almost all financial institutions that signed this commitment have the ambition to bring their portfolio in line with the 1.5 degree scenario in 2030 and to eventually achieve a net-zero portfolio by 2050. Financial institutions apply a number of tools which contribute to meeting the targets in the Paris Climate Agreement, among which include engagement policies, divestment and exclusion and voting policies. Financial institutions are also implementing climate-related changes into their governance and operational policies, such as employee training and the involvement of directors in the implementation of the action plan. However, the Minister does note that most action plans tend to contain generic descriptions and therefore should be made more specific to provide sufficient insight into how measures will contribute in practice to achieving the CO2 reduction objectives.
The Minister explores how legislation can strengthen the contribution of financial institutions to the sustainability transition. The Minister highlights two focus points: (1) the proper management of sustainability-related financial risks; and (2) the prevention of greenwashing. In this regard, the Minister proposes three potential instruments that can be considered:
- An effort obligation to align financing and investments with the objectives of the Paris Climate Agreement– By shaping the obligation as an effort obligation instead of a result obligation, the Minister leaves room for financial institutions to determine their own manner of implementation.
- An obligation to draw up a climate plan – This plan should have clear rules regarding its content and should be combined with an obligation to implement the plan. Such a legal obligation requires financial institutions to be more specific about their actions and increase the credibility and feasibility of action plans.
- An extension of the legal requirements on engagement policies – Mandatory engagement requirements already apply to certain categories of asset managers and institutional investors. This specifically focusses on the strategies, which currently remain the most abstract.
The Minister observes that new legal instruments should have added value compared to the existing frameworks and upcoming (EU) regulations and that the level playing field with other EU Member States should be ensured. The Minister welcomes input from the sector, scientists, regulators and societal organisations.