Banking Regulation 2022

Last Updated September 15, 2021

Austria

Law and Practice

Authors



Fellner Wratzfeld and Partners has a team of more than 120 highly qualified legal personnel. The firm’s major fields of specialisation include banking and finance, corporate/M&A, real estate, infrastructure and procurement law, changes of legal form, reorganisation and restructuring. Fwp advises renowned credit institutions and financial services providers on financing projects, representing mainly Austrian and international private companies, but also acts for clients from the public sector. The firm’s expertise has proven its worth repeatedly, not only in connection with project and acquisition financing, but also in regard to financing company reorganisations; fwp is also able to draw upon substantial experience gained in the financing of complex consortia in the last few years.

The primary purpose of the Austrian regulatory framework for the banking sector is to maintain a stable financial system, by doing the following:

  • increasing financial stability and the ability of financial institutions to bear losses;
  • ensuring efficient lending to business and individuals; and
  • progressing harmonisation in the area of bank supervision within the European Union.

In accordance with its EU membership, Austria has implemented a banking and financial framework that is highly influenced by European rules and regulations. The key Austrian legislation applicable in the banking sector is as follows:

  • the Banking Act (BWG), which provides the fundamental framework applicable to credit institutions and financial institutions in Austria, including the licensing regime, supervision, capital and liquidity requirements, and receivership proceedings and penalties;
  • the Payment Service Act 2018 (ZaDiG 2018) and the E-Money Act 2010 (E-GeldG) implement the Payment Service Directive (Directive EU 2015/2366) (PSD II) and the Electronic Money Directive (Directive 2009/110/EC). ZaDiG 2018 and the E-GeldG provide, among others, the licensing and capital requirements for payment and e-money institutions;
  • the Bank Recovery and Resolution Act (BaSAG) implements the Bank Recovery and Resolution Directive (Directive 2014/59/EU (BRRD) and provides for the obligation of credit institutions to draw up recovery and resolution plans. The implementation of the Single Resolution Mechanism (SRM) at the EU level required a revision of the BaSAG in 2015 – most of the amendments entered into force in January 2016;
  • the Securities Supervision Act 2007 (WAG 2007), and additional regulations, provides for the licensing of investment service providers, customer protection provisions, disclosure and notification requirements, etc. The Securities Supervision Act 2018 (WAG 2018) entered into force on 3 January 2018 and implements a substantial part of the Markets in Financial Instruments Directive (Directive 2014/65/EU – (MiFID II). The amended law ensures that Austrian law is in line with the provisions of the Markets in Financial Instruments Regulation (Regulation (EU) No 600/2014 – MiFIR), which has applied since 3 January 2018;
  • the Capital Markets Act (KMG), which primarily implements the Prospectus Directive (Directive 2003/71/EC – PD), provides in particular for the prospectus framework relevant to securities offerings and offerings of investments in Austria;
  • the Stock Exchange Act (BörseG) and the Takeover Act (ÜbG) provide the legal framework relating to the listing and trading of securities as well as public takeover offerings. The amended Stock Exchange Act 2018 (BörseG 2018) came into force on 3 January 2018, implementing certain MiFID II provisions and introducing the possibility for a legal delisting of publicly traded stock companies from the Official Market, which is now the only regulated market in Austria; and
  • the Securities Deposit Act (DepotG) regulates the depositing and acquisition of securities.

In addition to Austrian law, certain EU regulations are directly applicable to Austrian credit institutions, such as the Capital Requirements Regulation (Regulation No 575/2013/EU – CRR), which, to a large extent, is based on the Basel III standards issued by the Basel Committee on Banking Supervision. The CRR includes most of the technical provisions governing the prudential supervision of Austrian credit institutions.

Regulatory Authorities

The Austrian Financial Market Authority (FMA) is established as an integrated supervisory institution, supervising all financial service providers in Austria. It shares responsibilities with the Oesterreichische Nationalbank (OeNB) in connection with banking supervision. While the OeNB is in charge of fact-finding, including on-site and off-site analysis of banks, the FMA is responsible for the decision-making process and is therefore empowered to act as the competent authority in the areas of banking supervision and banking recovery and resolution. The European Central Bank (ECB) is responsible for banking supervision in the European area under the Single Supervisory Mechanism (SSM) and supervises significant entities in Austria, together with the FMA as the National Competent Authority (NCA) and the OeNB. Therefore, the FMA works in close co-operation with the ECB and the OeNB. However, the exclusive responsibility for granting and extending concessions of CRR credit institutions (ie, those credit institutions that receive deposits or other repayable funds from the general public and grant loans on their own account pursuant to Article 4 para 1 no 1 of the CRR) lies with the ECB. For Austrian non-CRR credit institutions and branches of foreign credit institutions, the exclusive responsibility remains with the FMA.

Types of Licence

The ECB licenses CRR credit institutions in SSM Member States and those (mixed) financial holding companies for which it is the consolidating supervisor. However, the scope of the licence granted by the ECB also extends to regulated activities under Austrian law.

The FMA licenses the following:

  • all credit institutions that have their registered seat in Austria and are not classified as CRR credit institutions but only as CRR financial institutions; and
  • (mixed) financial holding companies that have their registered seat in Austria and for which the FMA is the consolidating supervisor, provided that at least one group member is a credit institution and more than 50% of the own funds, consolidated turnover, income or other indicators within the group are attributable to CRR credit institutions or CRR financial institutions.

Licences granted can be subject to conditions and requirements, and can cover one or more types of transactions listed in Section 1 of the BWG.

In Austria, licensed credit institutions may also provide banking services in other Member States by way of using the freedom of establishment or by using the freedom to provide services.

Since 29 May 2021, (mixed) financial holding companies registered in Austria must apply for a special licence as a (mixed) financial holding company upon exceeding specified trigger thresholds relating to the equity, consolidated assets, revenues, personnel or other indicators of a subsidiary qualifying as a credit institution, investment firm or financial institution. The corresponding licensing procedure is basically comparable to that of a banking licence procedure, but its scope is a bit reduced.

Activities and services covered, and any restrictions on licensed banks’ activities

Pursuant to the BWG, an entity requires a credit institution licence issued by the competent supervisory authority to carry out activities listed in Section 1 para 1 of the BWG, particularly when carrying out one or more of the following activities for a commercial purpose:

  • deposit business (Einlagengeschäft);
  • current account business (Girogeschäft);
  • lending business (Kreditgeschäft);
  • discount business (Diskontgeschäft);
  • custody business (Depotgeschäft);
  • the issuing and administration of payment instruments (Ausgabe und Verwaltung von Zahlungsmittel);
  • trading for one’s own account or on behalf of others on specific markets or with certain instruments set out in Section1 para 1 no 7 lit a-f of the BWG, including trading with futures and equity swaps or financial instruments pursuant to the WAG 2018;
  • guarantee business (Garantiegeschäft);
  • securities issuing business (Wertpapieremissionsgeschäft);
  • building savings and loan business (Bauspargeschäft);
  • investment fund business (Investmentgeschäft);
  • real estate investment fund business (Immobilienfondsgeschäft);
  • capital financing business (Kapitalfinanzierungsgeschäft);
  • factoring business (Factoringgeschäft);
  • money brokerage transactions on the interbank market or the brokerage of transactions in connection with specific banking transactions (Geldmarktgeschäft);
  • severance and retirement fund business (Betriebliches Vorsorgekassengeschäft); and
  • exchange bureau business (Wechselstubengeschäft).

An entity must also be licensed by the competent supervisory authority as a financial institution to carry out additional activities listed in Section 1 para 2 of the BWG, particularly when carrying out one or more of the following activities for a commercial purpose in addition to their activities as a credit institution:

  • leasing business (Leasinggeschäft);
  • consulting companies on capital structure and industrial strategy (Beratung über die Kapitalstruktur);
  • providing trade information (Erteilung von Handelsauskünften);
  • providing safety deposit box management services (Schließfachverwaltung);
  • providing payment services under the Payment Service Act 2018 (ZaDiG); and
  • issuing e-money under the E-GeldG.

The licence for conducting banking activities as a credit institution or additionally as a financial institution may be granted with connected conditions and obligations, and may be restricted to the individual banking activities mentioned above. The scope of the licence(s) granted to each entity is publicly available in the company database of the FMA.

Application Process

In general, the ECB is responsible for granting and extending licences to CRR credit institutions. For Austrian non-CRR credit institutions and branches of foreign credit institutions in Austria, competence remains with the FMA.

Nevertheless, all applications must be submitted to the FMA, regardless of whether the decision is to be taken by the FMA or the ECB.

The following key documents are to be reviewed by the FMA/ECB as part of the licensing process:

  • the application for the authorisation of a credit institution; and
  • the business plan, which reflects the European Banking Authority (EBA) and ECB requirements referred to in the application for the authorisation of a credit institution.

The licensing process for CRR credit institutions, for which the ECB is responsible, is as follows.

Before the application is submitted to the FMA, there is a preliminary discussion phase in which the receipt of the application is confirmed. After formal confirmation by the FMA, a formal ECB approval decision must be issued within 12 months. The ECB's experts must be involved by the FMA at an early stage of this process.

The FMA assesses whether the conditions set out in the BWG are met in the application. If the applicant fulfils the conditions, the FMA forwards the application with a draft decision and the relevant documentation to the ECB for the decision-making process. The ECB conducts its own assessment of the application based on the FMA's draft decision and makes a final decision, which is then notified to the applicant. The average timing depends on whether or not the application is for a “full” licence and therefore for major banking activities, but the process should be completed within 12 months.

Licensing applications for Austrian non-CRR credit institutions (CRR financial institutions) or Austrian branches of non-EU-based and non-EEA-based (CRR and non-CRR) credit institutions are conducted entirely by the FMA.

Requirements

The licence is issued by the FMA (or the ECB for CRR credit institutions) if the following requirements are fulfilled:

  • the undertaking is a corporation, a co-operative society or a savings bank;
  • the articles of association do not contradict the provisions of the Banking Act that ensure the security of assets and the proper conduct of business;
  • the capital, liquidity and solvency of the institution prospectively are sufficient;
  • internal organisation regarding risk management, compliance and audit is compliant;
  • the persons holding qualifying participations (more than 10% of the share capital or voting rights) meet prudent requirements;
  • any close ties of the institution to other natural persons or legal entities shall not prevent the FMA from fulfilling its supervisory duties;
  • legal or administrative provisions of a third country do not prevent the FMA from fulfilling its supervisory duties;
  • the initial capital shall amount to at least EUR5 million and shall be at the unrestricted and unencumbered disposal of the managers in Austria;
  • the members of the management board or the members of the supervisory board are financially sound;
  • the members of the management board, the head of banking compliance, the AML officer and the head of securities services compliance are sufficiently suitable, and the members of the supervisory board have sufficient professional qualifications and experience;
  • the managing directors commit sufficient time to performing their functions;
  • the centre of at least one managing director's interests is in Austria;
  • the institute has at least two managing directors and the articles of association exclude individual power of representation. The managing directors may not have another main profession outside the banking industry; and
  • the location of the branch and the head office is in Austria.

Costs

The fee for an FMA licence for the operation of bank transactions amounts to approximately EUR10,000, and the extension fee for a licence amounts to EUR2,000. If the applicants engage a lawyer, further costs for the licence proceedings arise. Annual ongoing costs for the licence are also charged.

The ECB further charges annual supervisory fees to all CRR credit institutions in Austria, whereby significant banks must pay a higher supervisory fee than less significant banks.

Pursuant to Section 20 para 1 of the BWG, the FMA must be informed in advance in writing by any person who has taken a decision to acquire or dispose of (directly or indirectly) a participation of 10%, or to increase or decrease a qualified shareholding by reaching a 20%, 30% or 50% threshold of voting rights or capital in an Austrian credit institution (or in such a way that the credit institution becomes a subsidiary undertaking of that party).

Furthermore, the credit institution shall immediately notify the FMA in writing of any acquisition or relinquishment of qualified shareholdings, and of any reaching, exceeding or falling below the shareholding thresholds as soon as it becomes aware thereof. In addition, credit institutions must notify the FMA in writing at least once a year of the names and addresses of shareholders holding qualified interests.

The FMA has a maximum of 60 working days from the receipt of the notification and all the documents required pursuant to Section 20b para 3 of the BWG to prohibit the proposed acquisition in writing following an assessment according to the assessment criteria set forth in Section 20b of the BWG, provided there are reasonable grounds therefor, or if the information submitted by the proposed acquirer is incomplete. Thus, the FMA shall examine the suitability of the interested buyer and the financial stability of the intended acquisition.

The FMA will review and assess all information provided by the proposed acquirer in connection with the notification, focusing on the criteria set by law.

Specific information to be filed is provided for in the Ownership Control Regulation, including information about:

  • the identity of the proposed acquirer, by-laws, management board, economic beneficiaries, etc;
  • the reliability of the acquirer with regard to criminal or administrative offences, insolvency proceedings, etc;
  • the participations with a group of companies as well as other possible ways to exercise influence;
  • the relevant business relationships, family ties or other relevant relationships, as well as acquisition interests;
  • the financial situation and credit standing of the acquirer;
  • the funding of the intended acquisition, including disclosure of all relevant agreements; and
  • the business plan, including a description of strategic objectives and plans if the acquirer gains control.

If the bank is listed on the Austrian stock exchange, an acquirer must also comply with the provisions of the BörseG and the Takeover Act (eg, filing and notification obligations, mandatory takeover bid, etc).

Similar requirements must be fulfilled if the proposed acquirer intends to acquire a qualified holding in an insurance company, an investment firm, an investment service provider or a payment institution.

The FMA has published a detailed set of guidelines and circular letters (FMA Rundschreiben) on the application and scope of the organisational regulations, which depend on the type of business activities envisaged by the entity. An institution has to implement and continuously monitor a comprehensive set of organisational requirements, such as organisational structure, clear decision-making processes, documentation and reporting obligations, and responsibilities.

Furthermore, the management shall define and oversee the internal principles of proper business management (“fit & proper”), guaranteeing the requisite level of care when managing the institution, and focus particularly on the segregation of duties in the organisation and the prevention of conflicts of interest and, therefore, establish mechanisms to safeguard the security and confidentiality of information, pursuant to Section 38 of the BWG.

Banks are required to ensure the suitability of their managing directors, supervisory board members and holders of key functions on an ongoing basis. In addition to an internal guideline for the assessment process, banks are also required to provide ongoing training for their governing bodies and employees.

Sections 5 (1) (6)-(13), 28a and 30 (7a) of the BWG contain requirements for the members of the management and the supervisory board of credit institutions.

Fit and Proper Hearings

The FMA and the ECB apply an increasingly strict assessment procedure when evaluating the professional suitability of functionaries. Newly appointed governing bodies are invited to a hearing, and the theoretical knowledge required for the respective company is tested in an oral examination. The material covered for credit institutions includes financial expertise, the BWG and related ordinances, applicable special laws and European supervisory laws (CRR, EBA Regulatory Technical Standards, EBA Guidelines, etc) as well as the contents of the FMA Minimum Standards and FMA Circulars. Basic knowledge of corporate law and knowledge of the institution within the framework of the "know-your-structure" principle is also required.

Requirements for the remuneration policies and practice of credit institutions licensed in Austria are set out in Sections 39/2 and 39b of the BWG, and in the Annex to Section 39b. These provisions implement the EU Directive governing remuneration policies and practices (CRD IV and CRD V) into Austrian Law. The FMA has to take these regulations into account, according to the European convergence in respect of supervisory tools and supervisory procedures. As a consequence, the guidelines and recommendations (and other measures) that are issued by the EBA must be applied. Therefore, the Annex to Section 39b of the BWG, the circular letter (re-)issued by the FMA in January 2018 (Grundsätze der Vergütungspolitik und –praktiken; Rundschreiben der FMA zu §§ 39 Abs. 2, 39b und 39c BWG) and the guidelines from the EBA considering remuneration policies (eg, guidelines on sound remuneration policies under CRD IV and disclosures under the CRR) contain the main rules for restrictions on remuneration.

Therefore, the remuneration provisions of the BWG shall ensure that credit institutions adopt remuneration policies and practices that encourage their employees to act in a sustainable and long-term manner and align their personal objectives with the long-term interests of the credit institution.

Pursuant to Section 39 para 2 of the BWG, credit institutions and groups of credit institutions need to have administrative, accounting and control procedures for the identification, assessment, management and monitoring of banking business and banking operational risks, as well as risks arising from remuneration policies and practices, that are appropriate to the nature, scale and complexity of the banking business conducted.

The Financial Markets Anti-Money Laundering Act (Finanzmarkt-Geldwäschegesetz – FM-GwG) has been in force since 1 January 2017, transposing the international and European rules for the prevention of money laundering and terrorist financing into national law. Provisions relating to beneficial ownership are now also set out in the Beneficial Owners Register Act (Wirtschaftliche Eigentümer Registergesetz – WiEReG).

The FM-GwG imposes special due diligence requirements and defines special obligations for credit and financial institutions regarding due diligence and reporting in order to prevent money laundering and terrorist finance. Bank business may only be transacted with customers who have been identified – the “know-your-customer” principle.

Before a credit or financial institution begins a business relationship, it must verify the identity of the customer.

The Act on Deposit Guarantee Schemes and Investor Compensation (ESAEG) implements the Directive on Deposit Guarantee Schemes (Directive 2014/49/EU) and regulates the protection of deposits and credit balances, including interest on accounts and savings. The objective of the ESAEG is to ensure the rapid and comprehensive compensation of depositors’ claims in the event of a guarantee. The aim is to ensure that claims arising from security incidents are satisfied by the member institutions of the security schemes within a short period of time, so that financial obligations for the federal government can be avoided. In a guarantee case, deposits of up to EUR100,000 per customer and bank are covered. Every credit institution domiciled in Austria that wishes to accept customer deposits or provide investment services requiring guarantees must belong to a protection scheme.

Since 1 January 2019, the single deposit guarantee and investor compensation scheme limited liability company (Einlagensicherung Austria GesmbH – ESA) has assumed the responsibility for the compensation of all depositors and investors in Austrian credit institutions. Another institutional protection scheme as a limited liability company (Sparkassen-Haftungs-GmbH) is recognised as an alternative deposit guarantee and investor compensation schemes in Austria by the FMA and the ECB. In 2022, a third institutional protection scheme (Österreichische Raiffeisen-Sicherheitseinrichtung eGen) will be recognised.

Section 38 para 1 of the BWG stipulates the obligation of a bank, its shareholders, corporate bodies, staff and other persons who are acting on behalf of the bank not to disclose certain information and secrets that have come to their attention based on their relationship with the customers.

Secret in the legal context means a fact that is known only to the keeper of the secret themselves or only to a relatively limited circle of persons. Furthermore, the fact must not be accessible, or can only be accessible with difficulty to persons otherwise interested in such fact. This includes circumstances where disclosure or exploitation is likely to violate a legitimate interest of the customer. Accordingly, banking secrecy includes the name and contact details of the creditor, the amount of the credit volume and the account balance information of the customer.

The concept of a secret is also characterised by the subjective component that the holder of the secret has an interest or desire to treat a fact as a business secret, as the owner of the secret would be at a disadvantage in case of disclosure. However, as this desire to maintain secrecy may not be established in some situations, the negative criterion that the existence of a secret is excluded if the owner of the secret renounces the secrecy has been supported by scholars.

Banking secrecy is intended to protect the legitimate interests of a customer in maintaining the confidentiality of facts that become known to the bank in the course of the business relationship. This includes all secrets that are exclusively entrusted, disclosed or made accessible within the scope of a business relationship; such secrets may not be disclosed or exploited. This is necessary to maintain the basis of trust between credit institution and customer. Furthermore, the access of third parties to these secret facts – of the federal state in particular, but also of private persons interested in receiving information – is to be excluded or limited to the extent that the customer only has to accept exceptions from banking secrecy under certain conditions.

Exceptions to banking secrecy are stipulated in Section 38 para 2 of the BWG – eg, in criminal proceedings vis-à-vis public prosecutors and criminal courts.

Capital Requirements

Article 92 of the CRR sets out the specific capital requirements for the types of risk to be covered in accordance with Article 92 (3). Article 92 (2) of the CRR defines the capital ratio as a percentage of the total risk amount – the so-called solvency ratio (Solvabilitätskoeffizienten). The total risk amount is the sum of the institutions’ credit risk, operational risk, market price risks and the risk of a credit valuation adjustment. This total risk amount is to be compared to the own funds of the credit institution, resulting in the capital ratio of the institution.

Accordingly, credit institutions must maintain at least the following own funds requirements at all times:

  • a Common Equity Tier 1 capital ratio of 4.5%;
  • a Tier 1 capital ratio of 6%; and
  • a total capital ratio of 8%.

In addition to these minimum capital requirements, an institution must meet certain capital buffer requirements that.

As the capital buffers contained in the CRD have been transposed into Austrian law by Sections 23 to 23f of the BWG, the capital conservation buffer of 2.5% of risk-weighted assets (RWA) therefore applies by virtue of Austrian law and is applicable to every credit institution licensed in Austria.

However, the FMA may set additional capital buffers on an individual basis, including:

  • a countercyclical capital buffer of up to 2.5% of RWA generated in the respective EU Member State;
  • a systemic risk buffer for 11 Austrian groups of institutions, with five of the group member institutions additionally required to comply on an unconsolidated basis (between 0.5% and 1% of RWA in 2021 with a statutory flexible maximum of 5% of RWA); and
  • a buffer for global systemically important institutions (G-SIIs).

Liquidity Requirements

The CRR (CRR II) requires entities to hold enough liquid assets to deal with any possible imbalance between liquidity inflows and outflows under gravely stressed conditions during a period of 30 days (Liquidity Coverage Ratio – LCR) and to ensure their ongoing ability to meet short-term obligations. The LCR as a short-term liquidity business ratio was fully introduced in 2018; amendments made by the CRR II have applied since June 2021. The new rules impose a binding leverage ratio requiring institutions to maintain Tier 1 capital of at least 3% of their non-risk-weighted assets. An additional leverage ratio buffer will apply to G-SIIs. In addition, the European Commission has proposed that credit institutions should also ensure that their long-term obligations will be adequately met with a diversity of stable funding instruments under both normal and stressed conditions (Net Stable Funding Ratio – NSFR – as a long-term liquidity business ratio). Furthermore, entities are required by the BWG to ensure that they are able to meet their payment obligations at any time – eg, by establishing company-specific financial and liquidity planning based on banking experience pursuant to Section 39 para 3 of the BWG.

Austria has implemented the BRRD by adopting the BaSAG, thereby creating a national legal framework for dealing with banks that are failing or likely to fail. The BaSAG contains provisions covering the following:

  • prescribing the preparation of recovery plans by banks and by the resolution authorities, including powers to remove obstacles to a resolution (prevention);
  • enabling supervisory authorities to intervene at an early stage, including related additional powers to intervene (early intervention); and
  • forming the basis for the establishment of a national resolution authority and for entrusting the authority with the necessary powers and tools (resolution).

The following resolution tools are at the FMA’s disposal:

  • the sale of business tool;
  • the tool to establish a bridge institution (bridge bank);
  • the asset separation tool; and
  • the tool for the bailing-in of creditors (bail-in).

The bail-in is one of the core elements of the BRRD. It provides the resolution authority with the possibility to write down the eligible liabilities in a cascading contribution to absorb the losses of an institution, or to convert them into equity capital.

The amendments made by CRR II and CRD V regarding the capital requirements of credit institutions and investment firms shall strengthen the resilience of the banking sector by introducing more risk-sensitive capital requirements. Challenges arise in particular from the fact that these concepts designed for large institutions (“big players” and G-SIIs) – eg, total loss-absorbing capacity (TLAC) and minimum requirement for own funds and eligible liabilities (MREL) – may not be applied to small institutions without making adaptations, as Austria has a particularly large number of small and medium-sized banks.

The financial sector has faced recent challenges created by new ways of digitalisation and data processing technology within the field of banking operations and investment service providers (fintech). Traditional financial institutions in particular have to be aware of their new digital competitors. Other important issues include the rising standards of regulation, complexity and the increasing costs for the institutes. With regard to the current interest rates, the “Compliance tool” proposed by the European Commission aimed at facilitating institutions' compliance with their Regulations and Directives may enable each institution to rapidly identify the relevant provisions with which they have to comply and improve the Cost-Income-Ratio.

Fellner Wratzfeld and Partners

Schottenring 12
A-1010 Vienna
Austria

+43 1 537 700

office@fwp.at www.fwp.at
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Trends and Developments


Authors



DLA Piper Weiss-Tessbach Rechtsanwaelte GmbH is a global law firm with lawyers located in more than 40 countries throughout the Americas, Europe, the Middle East, Africa and Asia Pacific. DLA is the leading mid-market M&A and private equity firm in Europe and has more than 70 corporate partners across Europe specialising in private equity. The management advisory team has acted on more than 30 mandates over the last three years with a combined value of over EUR36 billion. The team has specific expertise in fundraising, buyouts and secondaries, buy and builds, sponsor and management, corporate venturing and venture capital, and exit planning and execution (M&A/IPO/Refinancing/return of cash).

ESG from the EU and Austrian Perspective

Due to ever-increasing environmental deterioration and climate change, the European Commission adopted the European Green Deal in 2020. As the new growth strategy, the European Green Deal sets numerous main goals, with the aim of transforming the EU into a more just and affluent society with a modern, competitive and resource-efficient economy by 2050, with no net greenhouse gas emissions and economic growth decoupled from resource usage. Additionally, in consideration of the principle of inclusion, in accordance with which the people must come first and special attention shall be given to those areas, industries and employees that are expected to confront the most difficult problems, the European Green Deal strives to safeguard, maintain and improve the EU's natural capital, and to protect people's health and wellbeing from environmental threats and hazards.

The European Green Deal has been welcomed in Austria, which has responded by stressing that it plans to switch to 100% renewable electricity by 2030 and become climate neutral by 2040. To this end, Austria is taking a number of regulatory steps and investing extensively in green mobility, renewable energy, more sustainable industry, eco-innovation, pollution management, and agricultural greening to attain this goal. In the fight against climate change, the Austrian National Energy and Climate Plan (Nationaler Energie- und Klimaplan – NEKP) has been adopted and recognises that more consistent execution and further measures are required. Austria is also focusing intensely on sustainable mobility as well as biodiversity and nature conservation.

One of the many aspects addressed and influenced by the European Green Deal is sustainable finance and environmental, social and governance (ESG) matters, which are being developed and implemented not just by the EU but also by other players in the financing industry – for instance, the Loan Market Association (LMA) focuses mainly on sustainable lending and the International Swaps and Derivatives Association (ISDA) focuses on derivatives. The role of sustainable finance may become increasingly important throughout the COVID-19 pandemic since it will assist in ensuring that investments promote a resilient economy and a long-term recovery from the pandemic's effects.

This article will outline several ESG/sustainable finance-related topics that are currently trending in the financial sector, beginning with a summary of the cornerstone EU legislative acts and following with an outline of other concepts that have recently been developed and implemented in the industry, taking into account specific trends in Austria.

EU Legislative Framework and Related Implications in Austria

To support the European Green Deal within the financial sector, the EU has focused on sustainable finance – ie, the process of considering environmental ESG factors when making financial investment decisions. The purpose of sustainable finance is to facilitate longer-term investments in sustainable economic activities and projects, thereby supporting economic growth while minimising environmental constraints, as well as taking ESG factors into consideration. Transparency when it comes to risks associated with ESG elements that may have an influence on the financial system, as well as the mitigation of such risks through adequate governance of financial and corporate players, are all part of sustainable finance.

Sustainable finance is important because, as a supplement to public funds, it channels private investment into the transition to a climate-neutral, climate-resilient, resource-efficient and equitable economy.

Austria has already implemented several legal concepts in different legal areas relating to ESG topics, including environmental law and companies law.

The following legislation has been adopted in order to implement the above-mentioned trends on the EU level, with the particular aim of pursuing green finance and investment.

Regulation (EU) 2020/852 of the European Parliament and of the Council of 18 June 2020 (the Taxonomy Regulation)

This provides the basis for a sustainable finance classification system (ie, a taxonomy). The aim of the Regulation is to establish the criteria for determining whether an economic activity qualifies as being environmentally sustainable for the purposes of establishing the degree to which an investment is environmentally sustainable, and to focus investments on sustainable initiatives and projects. As a result, the sustainable finance taxonomy should shield private investors from greenwashing, assist businesses in becoming more climate-friendly, provide investors with security, reduce market fragmentation, and assist in shifting investments to where they are most needed.

The sustainable finance taxonomy provides for four criteria under which an economic activity shall qualify as being environmentally sustainable if it:

  • contributes substantially to one or more of the environmental objectives set out in the Taxonomy Regulation; 
  • does not significantly harm any such environmental objectives;
  • is carried out in compliance with the certain minimum level of safeguards; and
  • complies with technical screening criteria that have been established by the European Commission.

For the purposes of these criteria, the Taxonomy Regulation provides for six environmental objectives:

  • climate change mitigation;
  • climate change adaptation;
  • sustainable use and protection of water and marine resources;
  • transition to a circular economy;
  • pollution prevention and control; and
  • protection and restoration of biodiversity and ecosystems.

Finally, the Taxonomy Regulation provides the basis for the establishment of the Platform on Sustainable Finance (ie, a permanent European Commission expert group), which is entrusted with advising the European Commission on how to improve the taxonomy.

Regulation (EU) 2019/2089 of the European Parliament and of the Council of 27 November 2019

This amended Regulation (EU) 2016/1011 of the European Parliament and of the Council of 8 June 2016 on indices used as benchmarks in financial instruments and financial contracts or to measure the performance of investment funds, by way of laying down minimal standards for EU Climate Transition Benchmarks and EU Paris-aligned Benchmarks and requirements regarding sustainability/ESG-related disclosures for benchmarks.

Regulation (EU) 2019/2088 of the European Parliament and of the Council of 27 November 2019 (Sustainable Finance Disclosure Regulation)

This sets out rules regarding the integration of sustainability risks and the consideration of adverse sustainability impacts, as well as sustainability-related disclosure obligations that apply to financial market participants and financial advisers in relation to end-investors.

The Sustainable Finance Disclosure Regulation requires financial market participants and financial advisers to publish on their websites information about their policies on the integration of sustainability risks in their investment decision‐making process, investment advice or insurance advice, respectively. Financial market participants and financial advisers are also required to include information on how those policies are consistent with the integration of sustainability risks in their remuneration policies. Moreover, certain obligations also apply in respect of pre-contractual disclosures regarding the transparency of the promotion of environmental or social characteristics as well as sustainable investments.

Please note that the Sustainable Finance Disclosure Regulation is not yet fully in force.

It is worth mentioning that, according to the Companies Law, certain legal entities are obliged to prepare a report on how they go about environmental matters, for instance. Such non-financial reports may be issued in the management report or as a standalone unit. Aside from this obligation, multiple legal entities publish additional information regarding ESG on a voluntary basis.

Other legislation

The European green bond standard is a voluntary standard to enable the green bond market to expand and increase its environmental goals, but is not yet in force.

In July 2019, the Austrian Control Bank (Österreichische Kontrollbank Aktiengesellschaft – OKB) issued the OKB Sustainable Financing Framework, which provides guidelines regarding the issuing of green, social and sustainability bonds.

New climate reporting guidelines for companies have been published by the European Commission, which comply with the standards outlined by Directive 2014/95/EU of the European Parliament and of the Council of 22 October 2014 (the Non-Financial Reporting Directive – NFRD). The NFRD is expected to be amended by the Corporate Sustainability Reporting Directive (CSRD), which is envisaged to implement the EU sustainability reporting standards, among others.

Forms of Sustainable Lending by the LMA

Entities other than the EU are also paying increasing attention to ESG-related issues in the financing sector. For instance, the LMA has initiatives relating to the standardisation of documentation and clauses that aim to support the ESG market.

The LMA has provided for several forms of sustainable lending, including Green Loans, Social Loans and Sustainability Linked Loans, and has offered further guidance on these types of loans.

Green Loans

These loan instruments are made available exclusively for financing or refinancing green projects. The concept of Green Loans is based on four core pillars:

  • the use of proceeds;
  • the process for project evaluation and selection;
  • the management of proceeds; and
  • reporting.

Green Loan proceeds shall be utilised only for green projects (ie, projects that provide clear environmental benefits, which shall be analysed, quantified and reported by the borrower). This must be properly documented in the underlying financial documentation and marketing materials, if relevant. Additionally, one or more tranches of a loan facility can be used to create a Green Loan. In such circumstances, the green tranche(s) must be properly identified, with proceeds deposited to a separate account or monitored in an appropriate manner by the borrower. In general, the categories eligible for green projects address the solving of significant environmental concerns, such as climate change, loss of biodiversity, air, water and soil pollution and the depletion of natural resources.

In respect of the process for project evaluation and selection, please note that the borrower should make the following known to its lenders:

  • the environmental sustainability objectives;
  • the method through which it assesses how the project fits into the eligibility categories; and
  • related eligibility requirements.

As regards the management of proceeds, for the purposes of ensuring transparency and supporting integrity, the proceeds of a Green Loan should be credited to a designated account or otherwise monitored by the borrower in an acceptable manner. The same applies if a Green Loan is structured as one or more tranches of a loan facility, whereby it is important that each green tranche is clearly identified. Borrowers are also urged to set up an internal governance structure that allows them to monitor the proceeds allocated to green projects.

Finally, the LMA emphasises the importance of reporting in the sense of making accessible and preserving information on the use of proceeds. In principle, such information shall be updated on an annual basis.

Social Loans

This type of loan instrument is made available exclusively for the financing or refinancing of social projects. Just like the concept of Green Loans, the concept of Social Loans is based on the four core pillars of the use of proceeds, the process for project evaluation and selection, the management of proceeds, and reporting. Generally speaking, the four pillars of Social Loans coincide with the four pillars of Green Loans so the above commentary also applies here, although there are certain differences.

Within the first pillar (ie, use of proceeds), social projects are defined as initiatives that actively address or ameliorate a specific social issue and/or strive to create beneficial social results for a specified demographic. In this respect, a social issue is defined as one that jeopardises, obstructs or degrades society or a specific target population's well-being (which in certain cases includes the public in general). 

Sustainability Linked Loans

This type of loan instrument and/or contingent facility incentivises the achievement of sustainability performance objectives. Unlike Green and Social Loans, Sustainability Linked Loans are based on five core pillars, as follows:

  • the selection of key performance indicators (KPIs);
  • the calibration of sustainability performance targets (SPTs);
  • loan characteristics;
  • reporting; and
  • verification.

Over their course, Sustainability Related Loans aim to improve the borrower's sustainability profile by matching loan conditions to the borrower's performance, which is monitored with the help of one or more external and/or internal sustainability KPIs. Since the credibility of the market of Sustainability Linked Loans will be determined by the KPI selection, the KPIs shall be relevant to the business of the borrower, and shall be measurable and able to be benchmarked.

Calibrating SPTs in accordance with KPI is of crucial importance in the structuring of Sustainability Linked Loans due to the fact that SPTs are a statement of the borrower's willingness to commit to a certain degree of ambition. The STPs shall be determined in good faith and shall be ambitious, albeit relevant.

In respect of the loan characteristics, the LMA has stressed that a crucial characteristic of Sustainability Linked Loans is that the economic outcome is determined by whether or not the established SPTs are fulfilled.

As far as reporting is concerned, please refer to the sections regarding Green and Social Loans, which apply mutatis mutandis. In addition, in general, borrowers shall make information about their SPTs public, and frequently include this information in annual and sustainability reports.

Finally, the verification pillar of Sustainability Linked Loans requires borrowers to obtain external and independent confirmation of their performance level in respect of SPTs for each KPI on an annual basis (in certain cases, such confirmations shall be made accessible to the public).

Sustainable lending is present in Austria both in practice and in terms of the regulatory response. In respect of the latter, the above-mentioned OKB Sustainable Financing Framework provides guidelines regarding loans to eligible green or social projects that may be provided by OKB via commercial banks or the lending programmes of the Development Bank of Austria (Österreichische Entwicklungsbank AG – OeEB).

ESG Derivatives

In addition to the LMA initiative, ISDA has responded to recent ESG developments by stating that the derivatives market (ie, sustainable finance) could be decisive for long-term funding of the transition to a sustainable economy.

The following types of products make up the ESG-related derivatives universe:

  • sustainability-linked derivatives;
  • ESG-related credit default swap (CDS) indices;
  • exchange-traded derivatives on listed ESG-related equity indices;
  • emissions trading derivatives;
  • renewable energy and renewable fuels derivatives; and
  • catastrophe and weather derivatives.

Conclusion

The current trends in the legal and financing sector from the ESG perspective may be expected to become even more important in the coming years, which will effectively result in stricter requirements for companies. ESG has also become important from an investor's point of view, which means that additional attention has been dedicated to ESG products. Apart from climate change and other environmental issues, the COVID-19 pandemic played a crucial role in boosting the importance of ESG-related questions, and has left its mark on the development of the ESG financing.

Accordingly, the legal realm of ESG, sustainable lending and other related topics will be subject to further legislative responses from the competent bodies on both a national and international level, and also to other initiatives from other players in the financial industry, which means all entities in these sectors shall keep a close eye on such developments.

DLA Piper Weiss-Tessbach Rechtsanwälte GmbH

Schottenring 14
1010 Vienna
Austria

+43 1 531 781 042

+43 1 533 52 52

jasna.zwitter-tehovnik@dlapiper.com www.dlapiper.com/de/austria/locations/vienna/
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Fellner Wratzfeld and Partners has a team of more than 120 highly qualified legal personnel. The firm’s major fields of specialisation include banking and finance, corporate/M&A, real estate, infrastructure and procurement law, changes of legal form, reorganisation and restructuring. Fwp advises renowned credit institutions and financial services providers on financing projects, representing mainly Austrian and international private companies, but also acts for clients from the public sector. The firm’s expertise has proven its worth repeatedly, not only in connection with project and acquisition financing, but also in regard to financing company reorganisations; fwp is also able to draw upon substantial experience gained in the financing of complex consortia in the last few years.

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DLA Piper Weiss-Tessbach Rechtsanwaelte GmbH is a global law firm with lawyers located in more than 40 countries throughout the Americas, Europe, the Middle East, Africa and Asia Pacific. DLA is the leading mid-market M&A and private equity firm in Europe and has more than 70 corporate partners across Europe specialising in private equity. The management advisory team has acted on more than 30 mandates over the last three years with a combined value of over EUR36 billion. The team has specific expertise in fundraising, buyouts and secondaries, buy and builds, sponsor and management, corporate venturing and venture capital, and exit planning and execution (M&A/IPO/Refinancing/return of cash).

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