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2021 | OriginalPaper | Chapter

10. Sustainable Finance: An Overview of ESG in the Financial Markets

Author : Marieke Driessen

Published in: Sustainable Finance in Europe

Publisher: Springer International Publishing

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Abstract

The author provides an overview of ESG in the financial markets. She sets out that sustainable finance has been around for years. After publication of the Sustainable Finance Action Plan by the European Commission in March 2018, sustainable finance rose to the top of the EU legislative agenda for the financial markets, as well as the regulatory and supervisory agenda of EU and national supervisors and competent authorities of the financial sector. The author provides an overview of various sustainable and ESG products that have been a feature of the international financial markets, such as green, ESG and sustainability-linked loans and bonds. The author also discusses the current legal framework in which these financial products are issued, with a focus on EU-level legislation, including the Taxonomy Regulation and the Sustainable Finance Disclosure Regulation, and considers legal and regulatory developments on the horizon, such as the Green Bonds Standard and Climate Benchmarks. The author concludes with a few remarks on general trends in ESG and sustainable finance developments in the financial markets.

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previous chapter Which Role for the Prudential Supervision of Banks in Sustainable Finance?

next chapter The Taxonomy Regulation: More Important Than Just as an Element of the Capital Markets Union

By way of example, in November 2008, the World Bank issued its first green bond, whereby the proceeds of the bond issuance were dedicated to a certain kind of project, based on eligibility criteria for projects and featured a second opinion provider (CICERO) to assess whether a particular project would make a positive impact on the environment. See: https://www.worldbank.org/en/news/feature/2018/11/27/from-evolution-to-revolution-10-years-of-green-bonds.

Commission to the European Parliament, the European Council, the Council, the European Central Bank, the European Economic and Social Committee and the Committee of the Regions (8 March 2018), Action Plan: Financing Sustainable Growth, COM/2018/097.

Many financial market participants with the ambition to be at the forefront of sustainable finance claim to have developed the first ever financial transaction of a certain type, resulting in claims to have acted on so-called “market firsts” for a company of a certain type, in a certain jurisdiction or with a certain characteristic. The Climate Bonds Initiative keeps a database of transactions that earmark proceeds for climate or environmental projects and have been labelled as ‘green’ by the issuer. See: https://www.climatebonds.net/cbi/pub/data/bonds.

For example, investors complain that some green financial products are little more than marketing, as they intend to finance, e.g., through green bonds, a company in a determinedly brown sector. See, e.g.: https://www.ft.com/content/c4cefa40-f4ab-11e9-b018-3ef8794b17c6.

For example, the Dutch Minister of Finance claimed that the green bonds issued by the Dutch government in 2019 would be dark green. See: https://english.dsta.nl/news/news/2019/04/08/issuance-20-year-sovereign-green-bond-on-21-may-2019.

The 2030 Agenda for Sustainable Development, adopted by all United Nations Member States in 2015, provides a shared blueprint for peace and prosperity for people and the planet through 17 Sustainable Development Goals (SDGs).

The Paris Agreement under the United Nations Framework Convention on Climate Change adopted on 12 December 2015 relates to one SDG specifically, i.e. Goal 13 which calls for urgent action to combat climate change and its impacts. The Paris Agreement officially entered into force on 4 November 2016, after 55 countries accounting for 55 per cent of the total global greenhouse gas emissions, deposited their instruments of ratification, acceptance or approval with the UN Secretary-General. As of June 2020, 195 signatories and 189 countries have joined the Paris Agreement.

CBI, Climate Bonds Standard and Certification Scheme, available at: https://www.climatebonds.net/.

ICMA (June 2018), Green Bond Principles, available at: https://www.ICMAgroup.org/assets/documents/Regulatory/Green-Bonds/Green-Bonds-Principles-June-2018-270520.pdf.

ICMA (June 2020), Social Bond Principles, available at: https://www.ICMAgroup.org/assets/documents/Regulatory/Green-Bonds/June-2020/Social-Bond-PrinciplesJune-2020-090620.pdf.

ICMA (June 2018), Sustainable Bond Guidelines, available at: https://www.ICMAgroup.org/assets/documents/Regulatory/Green-Bonds/Sustainability-Bonds-Guidelines-June-2018-270520.pdf.

ICMA (June 2020), Sustainability-linked Bond Principles, available at: https://www.ICMAgroup.org/assets/documents/Regulatory/Green-Bonds/June-2020/Sustainability-Linked-Bond-PrinciplesJune-2020-100620.pdf.

For example, ICMA (May 2020), Sustainable Finance, High-level Definitions, available at: www.ICMAgroup.org/assets/documents/Regulatory/Green-Bonds/Sustainable-Finance-High-Level-Definitions-May-2020-110520.pdf.

ICMA, Sustainable Finance, High Level Definitions, page 5, available at: www.ICMAgroup.org/assets/documents/Regulatory/Green-Bonds/Sustainable-Finance-High-Level-Definitions-May-2020-110520.pdf.

Currently 108 Equator Principles Financial Institutions (EPFIs) in 38 countries have officially adopted the EPs, covering the majority of international project finance debt within developed and emerging markets, see: https://equator-principles.com/about/. The Equator Principles were last updated in July 2020, see: https://equator-principles.com/wp-content/uploads/2020/05/The-Equator-Principles-July-2020-v2.pdf.

All figures as reported by Bloomberg research company BloombergNEF, see: https://about.bnef.com/blog/sustainable-debt-sees-record-issuance-at-465bn-in-2019-up-78-from-2018/.

ICMA (June 2018), Green Bond Principles, available at: https://www.ICMAgroup.org/assets/documents/Regulatory/Green-Bonds/Green-Bonds-Principles-June-2018-270520.pdf.

ICMA (June 2020), Social Bond Principles, available at: https://www.ICMAgroup.org/assets/documents/Regulatory/Green-Bonds/June-2020/Social-Bond-PrinciplesJune-2020-090620.pdf.

ICMA (June 2018), Sustainable Bond Guidelines, available at: https://www.ICMAgroup.org/assets/documents/Regulatory/Green-Bonds/Sustainability-Bonds-Guidelines-June-2018-270520.pdf.

LMA (May 2020), Global Loan Market Associations Launch New Guidance Documents to Support the Green Loan Principles and the Sustainability Linked Loan Principles, available at: https://www.lma.eu.com/news-publications/press-releases?id=176.

https://www.bourse.lu/green.

The Dow Jones Sustainability World Index is constituted of companies that are weighted in accordance with ESG characteristics, including Carbon to Value Invested, Carbon to Revenue, Weighted Average Carbon Intensity and Fossil Fuel Reserve Emissions. See: https://www.spglobal.com/spdji/en/indices/equity/dow-jones-sustainability-world-index/#data.

S&P Global, ESG in Credit Ratings, see: https://www.spglobal.com/ratings/en/products-benefits/products/esg-in-credit-ratings; Moody’s, ESG & Climate Risk, see: https://esg.moodys.io/insights-analysis#insights-MIS.

For a detailed discussion, see Chapter 5 by A. M. Pacces.

Directive (EU) 2017/828 of the European Parliament and of the Council of 17 May 2017 amending Directive 2007/36/EC as regards the encouragement of long-term shareholder engagement (investment strategies).

Recital 15 of the Shareholders Engagement Directive.

Capital requirements are set out in the Capital Requirements Directive (Directive 2013/36/EU) and the Capital Requirements Regulation (Regulation (EU) No 575/2013) and legislative instruments pursuant thereto. CRD/CRR refer to sustainability of policies and practices of financial institutions, underlining long-term considerations.

The ECB has made clear that climate scenario analysis and stress testing should explicitly feed into banks’ capital adequacy to help drive the European Green Deal. The US, meanwhile, shows no sign of introducing climate-risk stress tests for its banks. See: https://www.fitchratings.com/research/banks/climate-stress-tests-will-eventually-influence-bank-capital-10-09-2020.

NGFS members include central banks and financial supervisors from all five continents.

For a further discussion of the role of supervisors in the financial markets, see Chapter 9 by A. L. Riso.

ECB, Climate Change and the ECB, see: https://www.ecb.europa.eu/ecb/orga/climate/html/index.en.html.

ESMA (July 2019), Final Report Guidelines on Disclosure Requirements Applicable to Credit Ratings, available at: https://www.esma.europa.eu/sites/default/files/library/esma33-9-320_final_report_guidelines_on_disclosure_requirements_applicable_to_credit_rating_agencies.pdf.

AFM (April 2019), Sustainable Finance: The AFM and AMF Publish a Common Position on the Content of the Prospectus for Green Bonds, see: https://www.afm.nl/en/nieuws/2019/apr/transparantie-prospectus-groene-obligaties.

The EU rules on non-financial reporting apply to large public-interest companies with more than 500 employees. This covers approximately 6,000 large companies and groups across the EU, including listed companies, banks, insurance companies and other companies designated by national authorities as public-interest entities. See: https://ec.europa.eu/info/business-economy-euro/company-reporting-and-auditing/company-reporting/non-financial-reporting_en.

Directive 2014/95/EU of the European Parliament and of the Council of 22 October 2014 amending Directive 2013/34/EU as regards disclosure of non-financial and diversity information by certain large undertakings and groups.

The European Commission guidelines on non-financial reporting, first published on 26 June 2017 (last update on: 18 June 2019), available at: https://ec.europa.eu/info/publications/non-financial-reporting-guidelines_en#climate.

See below in paragraphs 4 and 5.

EC, Consultation Non-financial Reporting by Large Companies (updated rules), available at: https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/12129-Revision-of-Non-Financial-Reporting-Directive/public-consultation.

Regulation (EU) 2020/852 of the European Parliament and of the Council of 18 June 2020 on the establishment of a framework to facilitate sustainable investment, and amending Regulation (EU) 2019/2088.

The Taxonomy regulation is discussed in more detail in Chapter 11 by Ch. V. Gortsos.

Regulation (EU) 2019/2088 of the European Parliament and of the Council of 27 November 2019 on sustainability-related disclosures in the financial services sector.

The Sustainable Finance Disclosure Regulation is discussed in more detail in Chapter 12 by D. Busch.

For example, banks have started to impose general information undertakings in loan documentation that the borrower will provide ESG relevant information at request.

The consultation period ends on 2 October 2020.

EC, Targeted Consultation Document. Establishment of an EU Green Bond Standard, see: https://ec.europa.eu/info/sites/info/files/business_economy_euro/banking_and_finance/documents/2020-eu-green-bond-standard-consultation-document_en.pdf.

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 and amending Directives 2008/48/EC and 2014/17/EU and Regulation (EU) No 596/2014 (Text with EEA relevance).

Regulation (EU) 2019/2089 of the European Parliament and of the Council of 27 November 2019 amending Regulation (EU) 2016/1011 as regards EU Climate Transition Benchmarks, EU Paris-aligned Benchmarks and sustainability-related disclosures for benchmarks.

Commission Delegated Regulation supplementing Regulation (EU) 2016/1011 of the European Parliament and of the Council as regards minimum standards for EU Climate Transition Benchmarks and EU Paris-aligned Benchmarks; and Commission Delegated Regulation supplementing Regulation (EU) 2016/1011 of the European Parliament and of the Council as regards the explanation in the benchmark statement of how environmental, social and governance factors are reflected in each benchmark provided and published.

ESMA (29 April 2020), No Action Letter, available at: https://www.esma.europa.eu/sites/default/files/library/esma41-137-1300_esmar_article_9a3_opinion_-_bmr_nca.pdf.

The Markets in Financial Instruments (MiFID II) Directive 2014/65/EU and the Markets in Financial Instruments (MiFIR) Regulation (EU) No 600/2014.

Draft Commission Delegated Directive amending Delegated Directive (EU) 2017/593 as regards the integration of sustainability factors and preferences into the product governance obligations.

Draft Commission Delegated Regulation amending Delegated Regulation (EU) 2017/565 as regards the integration of sustainability factors, risks and preferences into certain organisational requirements and operating conditions for investment firms.

Draft Commission Delegated Regulation amending Delegated Regulation (EU) 2017/565 as regards the integration of Environmental, Social and Governance (ESG) considerations and preferences into the investment advice and portfolio management.

Commission Directive 2010/43/EU of 1 July 2010 implementing Directive 2009/65/EC of the European Parliament and of the Council as regards organisational requirements, conflicts of interest, conduct of business, risk management and content of the agreement between a depositary and a management company (UCITS) and Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 on Alternative Investment Fund Managers and amending Directives 2003/41/EC and 2009/65/EC and Regulations (EC) No 1060/2009 and (EU) No 1095/2010 (AIFMD), respectively.

Draft Commission Delegated Regulation amending Delegated Regulation (EU) 2017/2359 as regards the integration of ESG considerations and preferences into the investment advice for insurance-based investment products.

EC, Consultation Document. Consultation on the Renewed Sustainable Finance Strategy, see: https://ec.europa.eu/info/sites/info/files/business_economy_euro/banking_and_finance/documents/2020-sustainable-finance-strategy-consultation-document_en.pdf.

Title: Sustainable Finance: An Overview of ESG in the Financial Markets
Author: Marieke Driessen
Publisher: Springer International Publishing
Book: Sustainable Finance in Europe
Print ISBN: 978-3-030-71833-6

Electronic ISBN: 978-3-030-71834-3

Copyright Year: 2021
DOI: https://doi.org/10.1007/978-3-030-71834-3_10

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