ESG Integration and SRI Strategies in the EU

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.