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2021 | Book

Sustainable Finance in Europe

Corporate Governance, Financial Stability and Financial Markets


About this book

The aim of this edited volume is to bring together the views of expert academics and practitioners on the latest regulatory developments in sustainable finance in Europe. The volume includes a wide range of cutting-edge issues, which relate to three main themes along which the volume is structured: (1) corporate governance; (2) financial stability; and (3) financial markets. With individual contributions deploying different methods of analysis, including theoretical contributions on the status quo of macro-financial research as well as law and economics approaches, the collection encourages interdisciplinary readership and will appeal to those researching capital markets law, European financial law, and sustainable finance, as well as practitioners within the finance industry.

Table of Contents


General Aspects

Chapter 1. Sustainable Finance in Europe: Setting the Scene
The aim of this book is to collect the views of expert academics and practitioners on the latest regulatory developments in sustainable finance in the EU. The volume deliberately includes a wide range of cutting-edge issues. Although it focuses on the green transition, it also addresses social and governance issues. The individual contributions deploy different methods of analysis, including theoretical contributions on the status quo of macrofinancial research as well as law and economics approaches, encouraging interdisciplinary readership. The book chapters are grouped in a thematic way, covering the following areas: (i) general aspects (Part I); (ii) sustainable finance and corporate governance (Part II); (iii) sustainable finance and systemic risk (Part III); and (iv) sustainable finance and financial markets (Part IV). This chapter provides a summary and overview of the chapters. But before doing so the authors discuss the impact of the COVID-19 crisis on the sustainability agenda.
Danny Busch, Guido Ferrarini, Seraina Grünewald
Chapter 2. The European Commission’s Sustainable Finance Action Plan and Other International Initiatives
The actions proposed by the Commission’s Action Plan and analysed in this chapter respond to five broad strategies that can be defined as ‘public incentives’, ‘standardisation’, ‘disclosure’, ‘corporate governance’ and ‘financial regulation’. The first strategy consists of fostering investments through financial and technical support for sustainable infrastructure and other projects. In perspective, the European Commission will establish a single investment fund providing support and technical assistance to crowd in private investment. The second strategy includes the establishment of an EU taxonomy of sustainable activities which should help shifting capital flows towards them. It also includes the setting of standards and labels for green financial products, which should enhance the trust in the market of these products and ease investors’ access to them. These two strategies will help establishing well-defined and deep markets in sustainable investments and will work as preconditions to the others. The third strategy covers both corporate disclosure and third party information and assessments. The Non-Financial Disclosure Directive is being reviewed and complemented by other measures, such as an impact assessment of IFRS on sustainability. Sustainability benchmarks have been developed in order to allow investors to track and measure performance and allocate assets accordingly. In addition, credit rating agencies and market research services should integrate sustainability into their assessments. The fourth strategy combines sustainable corporate governance with attenuating short-termism in capital markets, and assumes that boards should develop their own sustainability strategies and act in the company’s long-term interest. Both disclosure and corporate governance are traditional strategies in capital markets regulation and functioning, while their extension to sustainability is a reflection of the new interest of investors and corporate stakeholders for ESG issues in addition to financial performance. The fifth strategy implies at least three types of regulatory reform. First, the Markets in Financial Instruments Directive (MiFID II) and the Insurance Distribution Directive (IDD) should be amended in the sense that investment firms and insurance distributors should consider sustainability issues when offering financial advice. Second, fiduciary duties of asset managers and institutional investors should be clarified so as to include ESG factors in the investment processes. Third, ESG should be incorporated in prudential requirements of financial institutions so that they channel their investments towards a more sustainable economy, while reducing the risks deriving from unsustainable economic development. These five strategies represent a very ambitious design of the European Commission which will require multiple actions at all levels. These actions generally require regulation and/or supervision often at EU level, but private incentives and cultural developments towards an environmentally sustainable economic system will also be important in furthering the success of the Action Plan.
Danny Busch, Guido Ferrarini, Arthur van den Hurk
Chapter 3. Sustainable Digital Finance and the Pursuit of Environmental Sustainability
In recent years technology and sustainability emerged as two main drivers for economy and finance, each with its own characteristics and following independent paths of development. The general discourse on the relationship between technology (more recently financial technology-fintech) and sustainability tended to emphasize the role of technology as a tool for pursuing sustainability mostly from the perspective of financial inclusion. Therefore the relationship with environmental sustainability was less often considered. This book chapter tries to answer the question on the role of digital finance as a tool for pursuing environmental sustainability, and the way specific policies might contribute to pursuing this goal. Adopting this perspective, this book chapter considers the emergence of sustainable digital finance as the clearest result of the interplay between technology and sustainability, assessing its potential for contributing to environmental sustainability. In doing this, this book chapter considers the most relevant public initiatives at the international level and provides a brief overview of the technologies involved in sustainable digital finance, assessing their own specificities and complementarity. Finally, this book chapter makes some critical considerations and proposes some policy suggestions to strengthen sustainable digital finance in a view of achieving ambitious societal goals.
Marco Dell’Erba

Sustainable Finance and Corporate Governance

Chapter 4. Redefining Corporate Purpose: Sustainability as a Game Changer
An increasing number of firms make reference to the pursuit of environmental and social goals in the definition of their purpose. This raises important issues with respect to the way in which the trade-offs between profit maximization and social value should be solved. As I show in this chapter, there are different perspectives that can be adopted to this end depending on the field of scholarship selected: economics, finance, management and law. Each perspective offers different nuances as to the way in which corporate purpose is defined and the conflict between the pursuit of profit and social value is dealt with. In Sect. 4.2 of this chapter, I argue that a broader concept of corporate purpose has gradually emerged over the years in economics, finance and management studies, as a result of various approaches to corporations such as corporate social responsibility (CSR) and stakeholder theory, which have been gradually integrated into the corporate governance framework. Environmental and social sustainability has come to characterize most of the instances of CSR and some core aspects of stakeholder governance, without discarding the pursuit of corporate profits as a long-term goal of the corporation. At the start of this century, sustainability concerns have entered into the area of finance studies through the theory of “enlightened shareholder value” (ESV) and its homologues like “shared value”. In Sect. 4.3 I argue, from a comparative law perspective, that corporate purpose has been variously defined in different jurisdictions, while European laws often consider the company’s interest rather than corporate purpose. However, corporate purpose is generally identified in practice with the pursuit of corporate profits, albeit with variations concerning the relevance of given stakeholders and social values in corporate governance. In general, legal definitions of corporate purpose are flexible and allow for different types of solution of the conflict between economic value and social value at firm level and within a given system. In Sect. 4.4 I critically analyse recent economics and management studies which argue that corporate purpose should be modified to reflect the prevalence of social value over shareholder value, and that the latter should be pursued by managers only derivatively, as a result of pro-stakeholders actions directed to increase the “total pie”. I object to this recent trend from a law and finance perspective and show my preference for keeping the relevant discussion within the confines of ESV theory. However, I admit that corporate purpose should be larger than profit from a behavioural perspective if we want to motivate people to perform outstandingly and sustainably in organizations. In Sect. 4.5, I emphasize the mounting role of regulatory and ethical constraints to business conduct deriving from sustainability concerns. These constraints go beyond the mere calculus required by ESV, which asks management to pursue stakeholder interests only to the extent that this increases the long-term value of the firm. Indeed, ethical considerations as reflected by international standards and consolidated best practices should apply to the running of businesses without necessarily requiring a prior analysis of their precise impact on financial performance.
Guido Ferrarini
Chapter 5. Sustainable Corporate Governance: The Role of the Law
The debate on sustainable finance seldom includes the perspective of shareholders. However, shareholders are important for the governance of publicly held corporations today, because their holdings are concentrated in the hands of few institutional investors. Institutional investors can therefore have an impact on the sustainability of the largest companies in the world, as they often claim they do—particularly in communications with their beneficiaries. Whether institutional investors actually have such an impact is an open question. Recent changes in EU financial regulation aim to bring more clarity on this matter. For instance, the revised Shareholder Rights Directive requires companies, on a comply-or-explain basis, to disclose voting policies and behaviours concerning sustainability. More in general, EU law is increasing the supply of standard measures of sustainable investment, to be used in institutional investors’ communications with their beneficiaries. This chapter discusses whether this legislation can align the incentives of institutional investors to pursue sustainable corporate governance with the prosocial preferences of their beneficiaries.
Alessio M. Pacces
Chapter 6. Integrating Sustainability in EU Corporate Governance Codes
In the light of the strong commitment by the EU in undertaking a sustainable path towards the goals set by the Paris Agreement and the UN 2030 Agenda, and the prospected EU initiatives concerning the establishment of a sustainable corporate governance, it is more pressing than ever evaluating how companies can truly integrate a long-term sustainable approach in their strategies and operations, and therefore whether corporate governance codes could provide a useful tool towards such objectives. Many authors investigated the effective implementation of corporate governance codes, but a few considered the role of the codes in promoting environmental and social responsibility. The aim of the chapter is to comparatively evaluate the most recent attempts to integrate sustainability considerations in corporate governance codes of listed companies within the EU Member States, in order to understand if such progress is on the way and which best practices could be taken into consideration and disseminated by the EU authorities in the years to come.
Michele Siri, Shanshan Zhu

Sustainable Finance and Systemic Risk

Chapter 7. Climate Change as a Systemic Risk in Finance: Are Macroprudential Authorities Up to the Task?
There is growing acknowledgement among policymakers that climate change may give rise to potentially catastrophic financial risk and impact financial stability. This chapter explores the specific features of climate-related financial risks (CRFR), drawing on a growing body of macrofinancial literature and policy work, and discusses the options macroprudential policymakers have in the face of such risk. It finds that there are significant challenges associated with ‘greening’ macroprudential policy, both epistemological and methodological as well as behavioural, and points to potential ingredients of a ‘green’ macroprudential policy. In the light of the radical uncertainty in relation to the dynamics of CRFR, the timing of policy action is of the essence. The chapter, in particular, explores the merits and challenges associated with a precautionary approach to tackling the systemic effects of CRFR. Finally, it briefly discusses the role that Central Banks can and should play in the transition to a low-carbon economy, both within the confines and in fulfilment of their price and financial stability mandates.
Seraina Grünewald
Chapter 8. Climate Change as a Threat to Financial Stability: Can Solutions to This Problem Accelerate the Transition to a Low-Carbon Economy? A Critical Review of Policy and Market-Based Approaches
Sustainable finance has so far been primarily defined through two complementary approaches, one centred around the notion of impact, the other one around risk management. This twofold theory of change, also formalised in the EU Sustainable Finance Action Plan, requires deeper scrutiny when applied to the banking sector, in the context of the Basel accords and their aim to foster financial stability. This chapter sets out to answer the question of whether the risk management or financial stability goal, decoupled from its impact twin, can—from a theoretical perspective and based on a critical review of models embedded in policy and market-based solutions—achieve the objectives of sustainable finance.
Sara Lovisolo
Chapter 9. Which Role for the Prudential Supervision of Banks in Sustainable Finance?
This chapter offers an insightful analysis of the role that supervisors can and should play in the field of sustainable finance. After reviewing how climate-related risks may affect the prudential framework, the chapter explores methodological questions relating to the difficulty to apprehend risks in a scenario of radical uncertainty. The author reflects then on the implications that these specific risks and the limitations of the current toolkit may have on the mandate of prudential supervisors. The chapter concludes by presenting an overview of the most recent practices and experiences in the light of the policies most recently adopted in particular by the European Central Bank and the European Banking Authority.
Antonio Luca Riso

Sustainable Finance and Financial Markets

Chapter 10. Sustainable Finance: An Overview of ESG in the Financial Markets
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.
Marieke Driessen
Chapter 11. The Taxonomy Regulation: More Important Than Just as an Element of the Capital Markets Union
On the basis of the European Commission’s 2015 Action Plan “on Building a Capital Markets Union” (CMU), as further specified in the 2017 “Mid-Term Review of the [CMU] Action Plan”, the European Parliament and the Council adopted on 27 November 2019 Regulation (EU) 2019/2088 “on sustainability-related disclosures on the financial services sector” (SFDR) and Regulation (EU) 2019/2089 “as regards EU Climate Transition Benchmarks, EU Paris-aligned Benchmarks and sustainability-related disclosures for benchmarks”. The third—and probably most important—part of the related “trilogy”, which is also based on the Commission’s 2018 “Action Plan on Financing Sustainable Growth”, is Regulation (EU) 2020/852 “on the establishment of a framework to facilitate sustainable investment” (the so-called Taxonomy regulation, TR). The objective of this legislative act (which, inter alia, also introduces specific amendments to the SFDR) is to establish uniform criteria for determining whether an economic activity qualifies as environmentally sustainable for the purpose of establishing the degree to which an investment is environmentally sustainable as well. It does not itself establish a label for sustainable financial products; the details of what constitutes an environmentally sustainable activity or product is being built-up through delegated acts to be adopted by the Commission, of which the first two will apply from 1 January 2022 and the other four from 1 January 2023. The main purpose of this Chapter is to briefly albeit systematically present the “system of rules” relating to the “core element” of the TR, namely the criteria according to which an economic activity will be considered environmentally sustainable and the six environmental objectives (the six types of economic activities which qualify as environmentally sustainable activities for the purposes of the taxonomy), and to analyse the TR’s field of application, as well as the disclosure requirements for environmentally sustainable investments, as set out in the TR. It concludes with the same considerations on how the core element of the TR will be of primary importance even for entities which are not covered by its scope of application, namely beyond the reach of the CMU project.
Christos V. Gortsos
Chapter 12. Sustainability Disclosure in the EU Financial Sector
The aim of the chapter is twofold. On the one hand, it explores the main features of the Sustainable Finance Disclosure Regulation. On the other hand, it tries to assess whether the Sustainable Finance Disclosure Regulation is likely to succeed in harmonising sustainability-related (i) disclosure rules and (ii) fiduciary duties, not only across Member States, but also across financial products and distribution channels. The author concludes that before we reach a sufficient degree of harmonisation of sustainability-related disclosure rules and fiduciary duties, there is still a long way to go. And even if we reach the required degree of harmonisation in the EU, it is not given that this will necessarily lead to a more sustainable world. As may be gleaned from the European Green Deal and the Sustainable Finance Action Plan, the EU is aiming high when it comes to sustainability. But the EU is not an island. The author argues that there are roughly two opposite scenarios. In a pessimistic scenario, the more lenient or even non-existent sustainability agenda of other geopolitical powers gives them a competitive edge that is detrimental to the EU. In a positive scenario, the EU becomes a global standard-setter in the area of sustainability. Large global institutional investors such as Blackrock and State Street in any event say they are strong supporters of the sustainability agenda. Also, the re-entry of the United States of America in the Paris Climate Agreement under the Biden Administration may give us some hope.
Danny Busch
Chapter 13. Integrating Sustainable Finance into the MiFID II and IDD Investor Protection Frameworks
Following its Sustainable Finance Action Plan, the European Commission has proposed amendments to integrate sustainable finance into the MiFID II and IDD investor protection frameworks. This contribution first sketches the behavioural problems explaining why retail investors do not always act upon their investment preferences and the potential role of the investment product distributor in bridging the gap between investors’ values and actual investment choices. Against this background, the author offers a critical overview of the most important changes to the MiFID II and IDD investor protection frameworks.
Veerle Colaert
Chapter 14. Emission Allowances as Financial Instruments
The author discusses the topic of emission allowances in relation to the MiFID II framework. While the structure and the mechanisms that underpin the functioning of the EU Emissions Trading System (ETS) system are, by now, well known, discussions on the protection of the environment and the development of secondary markets for emission allowances have stimulated a process of gradual inclusion of CO2 allowances in the perimeter of financial markets regulation. A first, significant step in this direction was taken by MiFID I: building on the definition of commodity derivatives introduced by the Investment Services Directive of 1993, MiFID I enlarged and amplified the catalogue of derivatives that would be considered as falling into its scope. The catalogue included then derivatives on emission allowances. The landscape set by MiFID I was, however, just a first step towards the inclusion of emissions trading in the scope of financial markets legislation. A second step has been taken by MiFID II, as the latter directly classifies rights on emission allowances falling in the EU regime as financial instruments. The author argues that the reasons that led to the qualification of emission allowances as financial instruments in MiFID II are basically a consequence of the tremendous evolution that secondary markets of allowances have seen in the last few years. The growing amount of transactions and the need to preserve and ensure the transparency and integrity of secondary markets convinced the European Commission of the opportunity to include emission allowances in the scope of MiFID II and, therefore, in the scope of the Market Abuse Directive (now Market Abuse Regulation or MAR). Looking at the positive effects for environmental protection that may derive from the inclusion of emission allowances in the scope of capital markets legislation, these are basically linked to the fact that—as a consequence of the approach stemming from MiFID II—secondary markets should effectively become more transparent, efficient and secure. However, according to the author, some potential drawbacks must be considered. Trading in emission allowances has become more expensive after MiFID II, and transaction costs might impact negatively on the liquidity of the market. The application of the Capital Requirements Directive (CRD IV, now CRD V) prudential requirements might also require the absorption of important levels of capital that would be distracted from direct investments in the industry. The effect that this might have on the system is, at the moment, unclear. The landscape introduced by MiFID II is also quite complex: there are at least two, if not three, different sets of comprehensive legislation that may potentially be relevant for trading emission allowances, either on the spot, or on the derivatives market, i.e. the “old” EU ETS; MiFID II and MAR; more tangentially, the Regulation on the wholesale Energy Market Integrity and Transparency (REMIT). The author discusses the implications of each of them and argues that opting in and out of each of these systems, through a complicated system of exemptions and exclusions, does not benefit the overall coherence of the regulatory approach.
Filippo Annunziata
Sustainable Finance in Europe
Prof. Dr. Danny Busch
Guido Ferrarini
Seraina Grünewald
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