Sustainable Finances and the Law

Several countries and regional organizations have basically been developing hard, comprehensive, and flexible regulations and guidelines specific to pension funds and asset managers regarding the integration of ESG considerations into their investment policies. Therefore, the author wants to understand what are the limitations and opportunities considering the particular nature and function of pension funds, their actual extension, and the potential for improvement.

This article describes the contents of banking regulations that address ESG (environmental, social and governance) issues globally, analyses them critically, points out some inconsistencies and remaining gaps, and concludes with recommendations for further improvement. It includes only regulations or guidance issued by banking regulators/supervisors, not market self-regulatory initiatives. The topics addressed by banking regulations herein described include: (a) the definition of relevant environmental, social and climate issues; (b) the characteristics of a sound environmental and social and climate risk management (encompassing the definition of the universe of relevant transactions and customers, criteria for the identification of the risks, due diligence processes and data sources for the identification of risks, consequences of risk assessment, risk mitigation, monitoring, classification and reporting, risk management at portfolio level and scenario analysis, integration into traditional risk categories, risk assessment for new financial products); (c) the definition of positive environmental and social impacts that can be generated by financial products (without approaching green taxonomies); and (d) governance issues that are required from financial institutions to manage environmental and social risks and opportunities properly (including the definition of roles and responsibilities, staff dimension and capacity-building, budget, integration of ESG factors into compensation schemes, mapping and communication with stakeholders, business strategy and target-setting, principle of proportionality, timeframe for implementation of policies, effects of voluntary commitments, periodic review of policies, environmental and social impacts of banks own operations). It concludes with recommendations for further regulatory actions and for a minimal content of a sound ESG banking regulation.

In Europe, the EU green taxonomy has been developed, and banks will have to start reporting their green asset ratio in 2024. Developments are also taking place so that capital requirements can be associated with the level of “green” loans that a bank has taken. Acknowledging the enlightenment that this approach could bring, it also incentivizes banks to lend money to green companies and potentially not to those that are still not green. Taking into account that a very small proportion of European companies are aligned with the EU green taxonomy, this could also be a very small market for banks. As such, this article argues for the importance of a transition green asset ratio that can be used by banks to actively promote the transition towards an economy aligned with decarbonization in 2050.

The European Investment Bank is one of the world’s main financiers of climate action and environmental sustainability.

The decade 2021–2030 is a critical timeframe for addressing our planet’s climate and environment emergency. To achieve this, trillions of investment are required, as the world must:The European Union is at the forefront of the global fight against climate change and environmental degradation. With the European Green Deal, the EU aims at making the European economy sustainable and inclusive. The EIB is an important partner in this new growth strategy while playing a leading role in the implementation of the Paris Agreement and the Sustainable Development Goals.

Sustainable development must be placed at the heart of all activities. All projects must meet Environmental and Social Standards with social development considerations increasingly mainstreamed in everything that is done.

This paper explores additionality analyses for offsets, a core theoretical requirement to ensure that emissions trading schemes reduce overall greenhouse gas emissions (GHGs). In the context of offsets, the additionality analysis evaluates whether an emission reduction would have occurred absent the incentive provided by the offset. The purpose is to determine whether reductions are caused by the policy intervention. The paper identifies a tension between adequate additionality analyses and the implementation costs they impose and evaluates these tensions in practice using two emissions trading programs in the United States, California Cap and Trade and the Regional Greenhouse Gas Initiative, as illustrative of the design challenges. The paper concludes that while holistic, project-specific quantifications of offset emissions relative to a counterfactual baseline scenario may not be necessary or practically feasible, evaluating one or two benchmarks may not be an adequate substitute to test such an important concept.

This chapter borrows from the economic and legal interpretation of carbon pricing approaches to identify what types of instruments could, in fact, be characterized as carbon pricing measures meaning an instrument that is capable of capturing the external costs of emitting an additional tonne of carbon by shifting the cost burden from the public to the private consumer. It looks into this topic from two different perspectives, i.e. national and international. The national perspective converses with the essence of the Paris Agreement. These would be the carbon pricing instruments a country could resort to in order to meet its nationally determined contributions (NDCs). At the international level, is the consideration for instruments that are capable not just of conferring a price on carbon but of finding price correspondence with other instruments that might have been administered by other countries. This paper ultimately brings to light the different dimensions of pricing carbon from national and international perspectives. It is expected that the classification and organization of the different instruments according to their ability to price carbon as an externality will assist policy makers not just in meeting their Paris Agreement commitments but also understanding the different instruments that are available to them when devising national mitigation strategies or undergoing environmental fiscal reforms.

The economics of adaptation to climate change is a relatively new area of research that aims to contribute to the selection of efficient adaptations or to assess whether adaptation actions that are already being implemented are efficient or not. However, the economics of adaptation is also confronted with several challenges and some of them are analysed in this text.

The first part of the text briefly describes the origins of climate change awareness in the scientific community and shows the recent (and very fast) progression of global adaptation planning. A basic definition of adaptation is given and related (and unrelated but, in this context, relevant) concepts are also mentioned. The basic criteria underlying the economics of adaptation to climate change are presented, as well as the main economic methods used to evaluate adaptation measures.

The second part of the text analyses some of the most important challenges to the economics of adaptation to climate change, which have been divided into three main categories: (1) methodological challenges; (2) challenges posed by the interactions between adaptation and relevant variables; and (3) challenges that stem from cognitive biases and behavioural issues.

An emphasis is given to cognitive bias and behavioural issues because the environmental challenges that the world is currently facing stem, to a large extend, from the fact that many didn’t see (and many still seem to not see) the urgent need to counteract (through adaptation or mitigation actions) the adverse effects of climate change.

Traditionally, the management of climate change issues has been the responsibility of environment ministers. However, due to its cross-cutting nature to international commitments and its growing impact on the economy and fiscal governance, finance ministers are called upon to play a key role in this matter. Indeed, finance ministers can no longer ignore the dangers that climate change poses to the real economy, financial stability, and public finance.

Climate-related risks—both physical climate risks and climate transition risks—can affect public finance through both microeconomic and macroeconomic transmission channels. Indeed, climate-related risks could cause direct and indirect fiscal impacts thereby deteriorating public finance.

Due to the effects of climate change, the government, and in particular the finance minister, may be called upon to play a kind of “lender of last resort” or, more precisely, the role of “insurer or bailout provider of last resort” for families, companies or even financial institutions.

Despite some uncertainties, geographical heterogeneity, and different legal systems, there is a strong likelihood that, to a greater or lesser extent, climate change will increasingly pose a challenge to public finance in the various jurisdictions.

The green budgeting technique is being adopted by an increasing number of countries and has the potential to align fiscal policy objectives with climate and environmental goals. Given that the (financial) sustainability of public finances and environmental sustainability are intrinsically interconnected with each other, this section argues that the traditional public debt sustainability analysis should be expanded to encompass climate and environmental sustainability considerations. Other key elements of a proper budgetary framework, such as fiscal transparency, should also be broadened to include the disclosure of the environmental and climate impacts of fiscal policy. The Green budgeting technique is increasingly used to expand the scope of such usual fiscal concepts. One of the main tools for its adoption is green tagging that enables citizens to assess the environmental and climate impacts of fiscal policy on both the revenue and spending sides of the state budget. It enables capturing both the positive and negative impacts of fiscal policy. Additionally, it provides more visibility to the amount financial resources countries allocate to climate and environment goals and to mitigation and adaptation policies while allowing the assessment of whether such goals are attained. A proper working fiscal framework, including the adoption of accrual accounting and performance programme budgeting, seems to be instrumental in this domain along with strong political commitment. Portugal has already taken a few steps such as the recently enacted Climate Law but still has a long way to go in terms of green budgeting. This section proposes a roadmap for its adoption. To start with, both the completion of the public accounts reform and the full adoption of programme budgeting foreseen in the 2015 Budgetary Framework Law should be attained. The meeting of such two pre-conditions will then lay the foundations for the implementation of green budgeting and disclose the climate and environmental impacts of policy measures following the international best practices. The adoption of green budgeting might also pave the way to the emission of green bonds to finance specific environmental and climate related projects. Such bonds might be a cost-effective way to finance the substantial green investment needs in a highly indebted country while contributing to the decrease of global risk.

If government authorities are committed to a more sustainable economy, a redirection of their public procurement can help to create the critical mass necessary for the existence and viability of important markets for the production of technologies, services and products with a reduced environmental impact (clean energy, electrical cars, smart buildings, etc.) and make an important contribution to the achievement of the goals established in relation to the fight against the main environmental and other problems at the local, national and international level. Although the preamble to the Government Procurement Agreement of 2012 does not mention the objective of sustainable development (contrary to the preamble to the Agreement establishing the World Trade Organization), it is very relevant that trade is mentioned nine times in the current Sustainable Development Goals, that national governments have formally recognized the role of public procurement in supporting sustainability (Goal 12.7) and that the WTO Government Procurement Agreement, far from being an obstacle for its Parties to use public procurement to pursue the objective of sustainable development, is increasingly a central force in public procurement worldwide.

Environmental, social and governance (ESG) perspectives have rapidly gathered speed and global reach over the past several years. Although often motivated by the desire to improve investor decision-making, ESG perspectives can also represent a broader ethic and understanding of the need for societal changes. This chapter focuses on the “E,” or environmental, pillar of ESG. It explores the relationship between environmental taxation and the ESG environmental pillar. In working toward environmental protection, both share common characteristics. As environmental protection policies, they operate alongside but outside of traditional, environmental command-and-control regulations. They both send a strong educational signal that can influence behaviour in environmentally positive ways. At the same time, they play very different but symbiotic roles. For example, environmental taxation instruments that effectively change behaviour allow the private sector to show more positive results when they disclose ESG data on a voluntary or compulsory basis. Conversely, ESG programs may help policymakers develop stronger environmental taxation policies and build support for market-based environmental protection instruments. Drawing on selected current ESG developments in the United States and European Union, the chapter presents the relationship between environmental taxation and ESG as a silent partnership. The public ESG spotlight often places disclosures centre front, but the more nuanced relationship between environmental taxation and ESG principles works quietly in the background. The chapter considers how this potential relationship—the silent partnership—may have the capacity to improve environmental protection.

Currently, carbon offset credits are gaining momentum in the voluntary and compliance markets. Many investors, private companies, or public entities look at them as a way to implement or supplement their decarbonization strategies. These tools are easily available to utilize for meeting the declared sustainability goals by compensating carbon emissions that are impossible or just hard to mitigate. At the same time, they can serve to comply with the regime of nationally determined contributions according to the Paris Agreement. However, they often pose challenges from a public and private perspective, both in a domestic or multinational scenario. There is a blatant lack of legal certainty concerning their treatment for tax purposes. This affects the agents involved in the different processes of the carbon offset credits’ lifecycle (their generation, trade, and use). The growing nature of this problematic situation simultaneously derives from qualitative and quantitative factors. A greater dose of international cooperation among the stakeholders is needed to provide balanced solutions between public and private interests. Special attention should be paid to the developing and developed countries’ positions. The following pages describe the state of the art and explain what the main concerns are with regard to the application of these credits in the framework of the existing tax systems. In many cases, carbon taxes are not mature enough, or their interaction with other economic instruments is not well defined. The innovative work of the United Nations Subcommittee on Environmental Taxation in this regard is reviewed. In an attempt to sort out the observed obstacles due to the configuration and features of the schemes up to date, some alternative proposals are mentioned. Final remarks stress that future regulations should not only facilitate but ensure a global positive environmental impact on society in line with the UN 2030 Agenda. Public finances, particularly, tax legislators and authorities have a decisive role to play in this uncharted area.

On 6 October 2022, Council Regulation (EU)2022/1854 on an emergency intervention to address high energy prices was adopted. The regulation introduced two fiscal measures: A “temporary solidarity contribution” imposed on the oil, gas, coal, and refinery sector to recover surplus profits generated during the fossil fuel crisis and a “cap on market revenues” for electricity producers. The regulation also outlines the use of these revenues in the Member States of the European Union (EU). The objective of this chapter is to demonstrate that these EU policy measures serve as fiscal instruments for accelerating the green transition. By imposing tax measures on windfall profits resulting from the energy crisis and requiring the Member States to use the proceeds for the purposes listed in the regulation, the EU created a redistribution tool to support its transition to renewable resources. The chapter examines in detail whether the solidarity contribution and the cap on market revenues as defined in the regulation can effectively contribute to sustainable financing as part of the EU’s energy and climate policy measures.

Based on the main environmental sustainability standards and principles on a European and global scale, a constructive rationale will be followed in order to analyse the tax benefit options adopted in the Portuguese tax system and possible needs for reform. The purpose is to make it more rational and efficient in a context of energy transition and the pursuit of demanding environmental goals as they ultimately derive from the Paris Agreement.

The reform proposals presented will focus mainly on tax benefits applicable on personal income tax, corporate income tax, excise taxes, and property taxes.

This article focuses on the importance of the “fit for 55” legislative package, which has as its main objective the transformation of the economy, society, and industry towards climate neutrality. Fit for 55 aims to ensure that the European Union meets the target of a 55% reduction in net greenhouse gas emissions by 2030 compared to 1990. There are several legislative proposals with regulations for areas as diverse as climate, energy and fuels, transport, buildings, land use, forests, or taxation. The legislation is presented as a comprehensive package, but will this package remain intact? Obviously, there are major political and legal challenges ahead. These various measures are positioned as inter-related and inter-dependent. They reflect a chosen policy mix of legal instruments that in turn represents a careful balance between pricing, targets, standards, and support measures. In this paper a critical analysis will be made of some of the main legislative proposals that are included in the “fit for 55” package, namely: (i) Reform of the Emissions Trading System; (ii) Effort Sharing Regulation (ESR); (iii) Revision of the Regulation on the inclusion of greenhouse gas emissions and resulting from activities related to land use, land use change and forestry (LULUCF); (iv) Revision of the Directive on the implementation of alternative fuels infrastructure; (v) Revision of the Regulation setting CO₂ emission performance standards for new passenger cars and new light commercial vehicles.

This reflection on environmental tax jurisprudence deals with some of the relevant jurisdictional decisions in which the legality of taxes on grounds of environmental protection purposes was syndicated. Despite its extra-fiscal purpose, the environmental tax respects the constitutional configuration of a tax legal instrument subject to the principles of the Fiscal and Economic Constitution, which, when interpreted by the courts, must be subjected to the strict proportionality test in its adequacy standpoint.