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2023 | Buch

ESG Integration and SRI Strategies in the EU

Challenges and Opportunities for Sustainable Development


Über dieses Buch

This book analyses sustainable finance policies implemented by the European Commission since January 2020. Gathering contributors from a range of European and international universities, it particularly aims to explore how EU strategy on green finance encourages and stimulates socially responsible investments that provide solutions to the challenges of the energy transition.

The book provides a comprehensive coverage of economic, financial and legal issues concerning green finance and ESG factor integration in the EU. The first part of the book discusses theoretical and empirical perspectives on socially responsible investments (SRIs) and ESG integration, while the second section focuses specifically on the role of corporate governance in both institutional and private investment spheres. The third part of the book explores valuation and risk, including a discussion of current trends in SRI funding in the new European ESG Regulatory Framework. The final section of the book discusses legal and regulatory issues including an exploration of blue finance and its incorporation into EU financial strategy. This edited collection will be of interest to researchers and policymakers working in green finance, sustainability, energy economics and financial law.


Chapter 1. Introduction
This chapter, written by the editors, provides the motivations of the book, describes its structure and summarizes the content of each chapter. The authors argue that globalization, climate change, and resource waste have led to the adoption of socially responsible economic behavior in financial industries. Also International initiatives like the UN Principles for Responsible Investment, climate bonds, and the Paris Agreement have promoted environmental, social, and governance (ESG) responsibility in investment decisions. This has led socially responsible investments (SRI) to evolve from a limited activity to an important part of the International Asset Management Capital Market. Proponents argue that SRI can influence companies to address corporate social responsibility, deliver “dual yields”, stabilize financial markets, and finance social policies. However, opponents argue that SRI strategies may have lower returns, higher expenses, and reduce market freedom. Recently, the EU has implemented regulatory measures to promote sustainable economic growth, reduce carbon emissions, and mitigate climate change through green finance. Critics argue that a balance between regulatory measures and market-based solutions is essential for effective implementation and enforcement across member states. The volume aims to analyze these issues by adopting a multidisciplinary perspective, incorporating contributions from scholars of economics, finance, law, and economic history.
Luca Spataro, Maria Cristina Quirici, Gabriella Iermano

Theoretical and Empirical Issues on SRI and ESG Integration

Chapter 2. Theory of Socially Responsible Investment: A Review
Socially responsible investment (SRI), where individuals look beyond financial payoffs to integrate environmental, social and governance (ESG) factors into their investment decisions, is not fully explained by standard models of preferences. Consequently, within the theoretical literature, economists have sought to enrich preferences by incorporating additional motivations for socially responsible behaviours. In this chapter, the authors first survey the investment literature, which introduces a ‘warm-glow’ benefit derived from the act of investing responsibly. However, within the investment literature, the mechanisms underlying this warm-glow benefit have been overlooked. Therefore, the authors draw on literature on public good provision and green consumerism to investigate the underlying social and moral mechanisms. They highlight the importance of incorporating elements of our shared humanity in order to understand economic behaviours in situations where the market mechanism is imperfect and incomplete. Subsequently, the authors propose an agenda for future research based on the two key questions dominating this literature. Firstly, would non-standard preferences which incorporate morally enriched warm-glow payoffs enable an efficient equilibrium to be achieved whereby externalities from production are internalised? Secondly, if government intervention is needed, what is the nature of this intervention under these non-standard preferences? Answering these questions would guide the efficient design of policy to catalyse SRI.
Laura Marsiliani, Lucy Naga, Thomas I. Renström, Luca Spataro
Chapter 3. The Performance of Socially Responsible Investing: A Review
This chapter provides a comprehensive examination of the existing empirical literature on socially responsible investments (SRI) compared to traditional investments. More precisely, it focuses on analysing various studies that have explored the performance of SRI mutual funds and portfolios in comparison to non-SRI investments. The authors also discuss the different theories that support the possible outcomes of these studies. Our research indicates that SRI do not result in worse returns and seem to perform similarly to standard assets, but with less volatility, particularly during times of crisis. However, there are methodological issues in estimating the full financial and non-financial performance of SRI, leaving the question of whether SRI strategies outperform traditional investment strategies still unanswered. The authors suggest that future research should aim to assess the overall value of SRI, not just its financial returns, by developing new measures that consider both the economic and social value of SRI.
Lisa Gianmoena, Luca Spataro
Chapter 4. SRI: An Insight on the Evolution of Its Definition and a Focus on the European ESG Regulation
This chapter analyses the evolution of the definition of SRI through a literature review. It will examine how the concept has developed from “Ethical Finance” to “Socially” and “Sustainable Responsible Investment” and highlights the main features of this approach to financial investment, which involves research, analysis, and selection of investments based not only on traditional economic and financial considerations, but also on environmental, social, and corporate governance criteria (ESG criteria). The author also intends to emphasize how this concept has been incorporated into recent European ESG Regulatory Frameworks, specifically the EU Taxonomy (852/2020/EU), which has realized the Action N.1 of the EC Action Plan on Financing Sustainable Growth, issued in March 2018, and the Sustainable Finance Disclosure Regulation (2088/2019/EU). Both regulations aim to increase the disclosure in sustainable activities by Financial Market Participants (MFPs). Additionally, the author considers the proposal presented in literature of a new possible “Classification Scheme” for sustainable investments. The analysis will show the necessity of implementing measures to achieve complete alignment between the various definitions related to the concept of “sustainable investment” in all the considered EU regulations. This alignment would help MFPs to avoid the risk of “greenwashing” as well.
Maria Cristina Quirici

Corporate Governance, SRI and ESG Integration

Chapter 5. Attractiveness of Sustainable Business and Investments: An Ethical, Legal or a Financial Issue?
Sustainable growth is a priority goal for the European Union's internal and external policies, as well as of the United Nations 2030 Agenda and Sustainable Development Goals. In enabling the transition towards a sustainable economy, private sector capital plays a crucial role because of the massive investments required to tackle the most pressing global challenges. But can a sustainable corporate and financial approach be considered attractive and compete with the traditional ways to run a business and collect investments from the public? Regulators and policymakers are adopting different measures in order to increase the reliability of sustainable-labelled companies and financial instruments, both promoting voluntary new standardized rules and mandatory disclosure and behaviour duties. Concerning profitability, measures to improve sustainability are often considered as not profitable because classical free cash flow analysis usually concentrates on the most probable case for the project assessment. Risk aspects are usually neglected or considered in a non-quantitative manner. The chapter focuses on two aspects. First, a successful transformation of today's business models requires a balance between legal and economic framework conditions. Second, economic aspects must be more strongly oriented to risk aspects in addition to profit.
Gabriella Iermano, Frank Andreas Schittenhelm
Chapter 6. ESG Initiatives and Directors’
On February 23, 2022, the European Commission adopted a Proposal for a Directive of the European Parliament and of the Council on Corporate Sustainability Due Diligence and amending Directive (EU) 2019/1937. The Proposal aims to harmonize existing national or voluntary rules on due diligence by establishing a corporate sustainability due diligence duty to address negative human rights and environmental impact. In this chapter the author analyzes the relations existing between ESG initiatives and directors’ fiduciary duties, to investigate what might be the limits of efficiency in ESG regulation. Directors’ duties concerning the ESG issues are only one part of the broader legal construction of “the company”, thus, a broader approach is probably necessary and suggests pathways towards more effective development of law and regulation in this field.
Dario Latella
Chapter 7. Insurance Industry and Sustainability Preferences: Contracts and Products
The chapter deals with the impact of the sustainability factors on the Italian insurance products market. Once the relevance of insurance companies for the growing-up of an ESG stewardship market has been highlighted, the chapter envisages contractual solutions that are able to promote sustainability objectives in the non-life sector, by means of derogations from the legal framework laid down in the Italian Civil Code. The placement of insurance products has then to be focused on, and this under a twofold point of view: (a) there are tools that concern the individual relationship between the insurer and the customer, and in this regard it is a matter of understanding the effects of the sustainability assessments in the field of sales with advice, sales without advice and execution-only regime; (b) there are tools that concern the insurance offer at a stage preceding the relationship with the individual customer, thus the very packaging of the product, in the perspective of developing a distribution strategy aimed at promoting ESG preferences. In the latter regard, the so-called insurance of large risks will be considered: product oversight and governance will be seen not only as a duty of manufacturers and distributors to protect the weaker contractual party, but also as an opportunity, left to the discretion of the manufacturer, to promote ESG objectives. The chapter analyses therefore the influence tools that the manufacturer may implement in the relationships with the distributor, and also the subsequent repercussions on the internal corporate governance policies of the insurance company.
Luca Della Tommasina

ESG Integration: Valuation, Products and Risks

Chapter 8. The Role of ESG on Credit Rating in the Banking Sector: A Mediation Analysis to Disentangle the Direct and Indirect Effects
The attention to sustainable finance has dramatically increased in the recent past. In Europe, the perceived relevance of financial sustainability is mainly due to the European Commission’s commitment to integrate Environmental, Social and Governance (ESG) parameters into all aspects of the financial system. Our objective is to investigate the existence and extent of the impact of compliance with ESG on Credit Rating of European companies. With reference to the financial sector, we use mediation analysis to disentangle the effect of standard balance sheet indicators (measuring the stability and leverage of a company) on Credit Ratings, into a direct one and an indirect one, this second mediated by the ESG rating. Given the different implications of the three aspects of the overall score, Environment, Social and Governance, we apply the methodology to each score separately considered. Results show that only Governance plays a role, with a significant indirect effect that is, however, negligible in magnitude. Data are provided by Thomson Reuters.
Manuela Fasano, Barbara Guardabascio, Elena Stanghellini
Chapter 9. The European Blue Economy Framework and Blue Bonds as New Instruments of Blue Finance
In this chapter, the author explores the growing relevance of the Blue Economy, with a particular focus on its European dimension. The author highlights trends and drivers in creating a new Blue Economy Framework that is necessary for achieving Goal 14, “Life below water”, which is one of the 17 SDGs of the UN 2030 Agenda. The Blue Economy encompasses activities related to the sustainable use of oceans, seas and coasts, as well as activities that enable the exploitation of ocean resources more efficiently and sustainably. The author argues that the development of innovative financial instruments of Blue Finance, specifically Blue Bonds, is essential for re-orienting investments towards blue sustainable projects. The author underlines the necessary efforts for reaching a regulation of Blue Bonds, which is currently absent, following the example of Green Bonds as the most widely used Sustainable Bond. Furthermore, the chapter analyses the rising Blue Bond Market, including recent issuances of Blue Bonds at the global and European level, as well as some issuances of Green Bonds with blue elements. The author points out that the Blue Bond Market is in its early stages and shows some critical issues that need to be resolved.
Maria Cristina Quirici
Chapter 10. The Effects of the European Sustainable Finance Disclosure Regulation on SRI Funds: A Comparison at a Global Level
This chapter aims to analyse the main trends that are currently characterising Sustainable Funds in the European Union. The authors document how these funds are reacting to the new European ESG Regulatory Framework, showing how recent actions carried out by the European Institutions—from the EC Action Plan on Financing Sustainable Growth, its subsequent Taxonomy Directive and Sustainable Finance Disclosure Regulation (SFDR) to the EU Green Deal and the Next Generation EU—are changing the existing financial contest into a more sustainable one. The authors argue that all these new ESG regulations represent important steps towards a new European Asset Management Industry, although they point out that a corrective intervention by the Regulator is needed to correct the inconsistency of the definition of sustainable investment and product drafted by SFDR in order to avoid greenwashing.
Maria Cristina Quirici, Gian Luca Giurlani

Legal and Regulatory Issues on SRI and ESG Integration

Chapter 11. ESG Targets for the Financial Sector and the Choice of Legal Instruments
Environmental, Social and Governance (ESG) is a topic of high priority within financial supervisory law. Climate change and the challenges of our time create an urgency for effective and efficient legislation and regulation. This chapter deals with the question of which legal instruments are appropriate to incorporate ESG goals into the business of financial institutions and related internal and external supervision. The European legislative framework on sustainability and Green Finance is materializing increasingly, notably through the Transparency Regulation and Taxonomy Regulation. European laws and regulations are not exhaustive, there is room for ambitions and goals that are formulated in the sphere of self-regulation, soft law and corporate governance. ESG regulation therefore lends itself to an approach from a multilevel governance perspective. The impact financial institutions have and how they contribute to ESG objectives should be reflected in regulation and supervision in an evidence-based way. Ideally, markets act as a feedback mechanism to regulators and legislators. This will be particularly valuable for longer-term objectives and in the fight against green-washing. ESG strategies and targets and their realization should be observable in practice. In this way, accountability can also be demonstrated, not only towards regulators, but towards all stakeholders of financial institutions.
Mark D. H. Nelemans
Chapter 12. Environmental, Social and Governance Criteria in the Netherlands: Interaction Between Government and the Courts
The author discusses the role of private law in achieving goals related to ESG (environmental, social and governance) criteria in the Netherlands, particularly in the context of climate change and energy transition. Private law can be used as a last resort when government and administrative law fail, influencing the policies of governments and companies. However, the author argues that recent developments challenge the trias politica, which is a cornerstone of the state's rule of law. Despite clear standards provided by international and EU law, companies and governments neglect court decisions, and appeal procedures delay action. Nonetheless, private law is starting to play a role, where banks refuse companies’ loans if their legal paperwork is not up to pace with the law, new forms of contracts regulating labor relations are bound to mandatory private law, and accountants put environmental hazards as legal hazards in annual reports, necessitating clients to contribute to environmental and climate improving measures. The author argues that innovative climate policy from the government is the most important route to change.
Bastiaan D. van der Velden
Chapter 13. The Language of the European Union About SRI: A Diachronic Linguistic Analysis (2002–2022)
This chapter is dedicated to a diachronic linguistic analysis of the—mainly legal and regulatory—language that the European Union has been using since 2002 up until 2022 to refer to SRIs. After a short and essential overview about the academic debate connected to the definition of SRI, I attempt to test the terminology implemented by some European institutions in relation to the semantic field connected to the notion of the socially/sustainable responsible investments. This linguistic analysis is performed using the online software Sketch Engine, that is, specifically dedicated to corpus linguistics. I try to verify if the change in the meaning of the acronym SRI can be measured over time and to which direction it points. The results show that the EU institutions—particularly the Commission through the ground-breaking “Taxonomy”—not only tried to legally regulate the recent growth of the financial phenomenon of SRIs but also were front runners in the attempt to guide this process. I show that the EU, though not completely ruling out the social and “moral” issues that were originally encompassed in the idea of SRI, has however significantly contributed to the shifting of this concept to a mainly environmentally related issue.
Alice Martini
ESG Integration and SRI Strategies in the EU
herausgegeben von
Luca Spataro
Maria Cristina Quirici
Gabriella Iermano
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