Sustainable Finance in Europe: Corporate Governance, Financial Stability and Financial Markets

Series Editors’ Preface
Contents
Notes on Contributors
List of Figures
List of Tables
Part I General Aspects
1 Sustainable Finance in Europe: Setting the Scene
1.1 Introduction
1.2 Sustainable Finance and COVID-19
1.3 General Aspects
1.4 Sustainable Finance and Corporate Governance
1.5 Sustainable Finance and Systemic Risk
1.6 Sustainable Finance and Financial Markets
2 The European Commission’s Sustainable Finance Action Plan and Other International Initiatives
2.1 Introduction
2.2 The Broader Perspective
2.3 EU Classification System (‘Taxonomy’)
2.4 Standards and Labels for Green Products
2.5 Fostering Investments in Sustainable Projects
2.6 Incorporating Sustainability When Providing Financial Advice
2.7 Sustainability Benchmarks
2.8 Better Integrating Sustainability in Ratings and Market Research
2.9 Clarifying Institutional Investors’ and Asset Managers’ Duties
2.10 Incorporating Sustainability in Prudential Requirements
2.11 Strengthening Sustainability Disclosure and Accounting Rule-Making
2.12 Fostering Sustainable Corporate Governance and Attenuating Short-Termism in Capital Markets
2.13 Concluding Remarks
3 Sustainable Digital Finance and the Pursuit of Environmental Sustainability
3.1 Introduction
3.2 Technology, Sustainability and the Emergence of Sustainable Digital Finance
3.3 International, National, and European Initiatives
3.4 The Infrastructural Technological Framework and How Does Digital Finance Become “Sustainable Digital Finance” or “Green Digital Finance”?
3.5 How Such Technologies Improve Sustainable Finance
3.6 Policy Consideration for Supporting Sustainable Digital Finance
3.7 Conclusions
Part II Sustainable Finance and Corporate Governance
4 Redefining Corporate Purpose: Sustainability as a Game Changer
4.1 Introduction
4.1.1 Scope and Aims of the Chapter
4.1.2 The New Stakeholderist Credo
4.1.3 Narratives of Corporate Purpose in Business Practice
4.1.4 The Impact of COVID-19
4.2 The Evolution of Corporate Purpose in Economics and Finance
4.2.1 Corporate Profits and Social Values
4.2.1.1 Milton Friedman on the Social Responsibility of Business
4.2.1.2 The Rise and Success of CSR
4.2.1.3 Advances in Stakeholder Theory
4.2.2 Combining Value Maximization with Stakeholder Theory and CSR
4.2.2.1 Michael Jensen on “Enlightened Shareholder Value”
4.2.2.2 Michael Porter and Mark Kramer on “Shared Value”
4.2.2.3 Hart and Zingales on “Shareholder Welfare”
4.3 The Comparative Law of Corporate Purpose
4.3.1 Continental Europe
4.3.1.1 The German Pluralistic Approach
4.3.1.2 French New Legislation and the Raison D’être of Companies
4.3.1.3 From Shareholder Value to Sustainable Success in Italian Corporate Governance
4.3.2 UK and US
4.3.2.1 Enlightened Shareholder Value in the UK Companies Act
4.3.2.2 US Law
4.3.2.3 A Brief Comparison
4.4 Social Value Acolytes V. Shareholder Value Purist
4.4.1 Colin Mayer on “Prosperity” and Corporate Purpose
4.4.1.1 Commitment to Corporate Purpose
4.4.1.2 Governance of Purpose
4.4.1.3 Our View
4.4.2 Alex Edmans’s “Pieconomics”
4.4.2.1 Pie-Splitting V. Pie-Growing
4.4.2.2 Comparison with ESV
4.4.2.3 Assessment
4.4.3 Rebecca Henderson on Reimagining Capitalism
4.4.3.1 The Promise and Limits of Shared Value
4.4.3.2 Organizational Purpose as Key to Change
4.4.3.3 Comparative Assessment
4.4.4 Lucian Bebchuk and Roberto Tallarita on Stakeholderism
4.4.4.1 Is ESV Different to Traditional Shareholder Value?
4.4.4.2 Limits of the Pluralistic Approach
4.5 Corporate Purpose and Sustainability
4.5.1 A Holistic View of Corporate Purpose
4.5.1.1 The Multiple Uses of Corporate Purpose
4.5.1.2 Enhancing Economic Value Under Environmental and Social Constraints
4.5.1.3 Sustainability as a Game Changer
4.5.2 Promoting a Sustainable Corporate Purpose
4.5.3 Are Firms and CEOs Credible?
4.5.3.1 Should Corporate Purpose Be Specified in the Charter?
4.5.3.2 Should Company Law Serve Sustainability Goals?
4.5.4 Concluding Remarks
5 Sustainable Corporate Governance: The Role of the Law
5.1 Introduction
5.2 Framing Sustainable Corporate Governance
5.3 Questions and Challenges
5.4 The Role of the Law
5.5 Conclusion
6 Integrating Sustainability in EU Corporate Governance Codes
6.1 Introduction
6.2 Corporate Governance Codes: The EU Approach
6.3 EU Approach to Sustainable Development and the Need for a Sustainable Corporate Governance
6.4 Methodology
6.5 Findings
6.5.1 The Purpose of Corporate Governance and of Codes
6.5.2 CSR/Sustainability
6.5.2.1 Sustainable Success
6.5.2.2 Sustainable Development/Value Creation/Sustainable Long-Term Value
6.5.2.3 Corporate Social Responsibility (CSR)
6.5.2.4 Stakeholders
6.5.3 Stakeholders
6.5.4 Employees
6.5.5 Gender Diversity
6.5.6 Sustainability/CSR Committee
6.5.7 Compensation and Sustainability
6.5.8 Sustainability Reporting
6.5.9 Ethics
6.6 Final Remarks and Future Steps
Part III Sustainable Finance and Systemic Risk
7 Climate Change as a Systemic Risk in Finance: Are Macroprudential Authorities Up to the Task?
7.1 Introduction
7.2 Climate Change as a Source of Financial Instability
7.3 ‘Green’ Macroprudential Policy
7.3.1 Implementation Challenges
7.3.2 Ingredients of a ‘Green’ Macroprudential Policy
7.3.2.1 Time Dimension of CRFR
7.3.2.2 Cross-Sectional Dimension of CRFR
7.4 Timing of Policy Action
7.5 Which Role for Central Banks?
7.6 Conclusions
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
8.1 The Paris Agreement: A Disruptive Legal Framework Focused on Impact
8.2 The Paris Agreement as a Threat to Financial Stability
8.3 Down the Financial Instability Route: Tools and Theoretical Frameworks
8.4 Balancing Impact and Financial Stability in the EU Action Plan on Sustainable Finance (2018–2019): A Challenging Task
8.5 Back to Impact: Emerging Regulatory Frameworks from the European Union
8.6 Conclusions
9 Which Role for the Prudential Supervision of Banks in Sustainable Finance?
9.1 Introduction
9.2 Climate-Related Risks and Prudential Supervision
9.2.1 The Risks Connected to Climate Change
9.2.2 The Tragedy of the Horizon and the Question of Short-Termism
9.2.3 The Relationship Between Climate-Related Risks and the Prudential Framework
9.3 Epistemic Aspects of Climate-Related and Environmental Risks
9.3.1 The Scarcity of Data
9.3.2 The Quest for the Identification of Climate-Related and Environmental Risks
9.3.3 Methodological Approaches to Risks Evaluation
9.3.4 The Level of Uncertainty: A Role for the Precautionary Principle?
9.4 The Mandate of Prudential Supervisors
9.4.1 The Thin Divide Between Politics and Policies
9.4.2 The Current Scope of Prudential Mandates
9.4.3 Towards an Evolution of Prudential Supervisors’ Mandates?
9.5 Supervisory Expectations and Supervisory Review
9.5.1 General Principles on Supervisory Expectations and Supervisory Review
9.5.2 Business Models and Strategy
9.5.3 Governance and Risk Appetite
9.5.4 Risk Management
9.5.5 Disclosure
9.5.6 Follow-Up to Supervisory Expectations—Supervisory Techniques and Tools
9.6 Conclusion
Part IV Sustainable Finance and Financial Markets
10 Sustainable Finance: An Overview of ESG in the Financial Markets
10.1 Introduction
10.2 ESG Products in the Financial Markets
10.2.1 Meaning and Standards of ESG/Sustainable Finance Generally
10.2.2 Green, Social and Sustainability(-Linked) Loans and Bonds
10.2.3 ESG Market Infrastructure
10.3 The Legal Framework Applicable to ESG in the Financial Markets
10.3.1 Corporate Governance
10.3.2 Supervisory Practices
10.3.3 Non-financial Reporting
10.3.4 Taxonomy Regulation
10.3.5 Sustainable Finance Disclosure Regulation
10.4 Upcoming Legislative and Regulatory Developments
10.4.1 EU Green Bond Standard
10.4.2 EU Climate Benchmarks
10.4.3 Amendments to Existing Financial Markets Legislation
10.4.3.1 MIFID II Amendments
10.4.3.2 Investments and Insurance (UCITS, AIFMD, IDD)
10.4.4 Future Amendments
10.5 Concluding Remarks on the Impact of Legislative Developments on the Financial Markets
11 The Taxonomy Regulation: More Important Than Just as an Element of the Capital Markets Union
11.1 Subject Matter and Scope of the Regulation—Environmental Objectives
11.1.1 Subject Matter
11.1.1.1 Introductory Remarks
11.1.1.2 The Considerations Set Out in the Regulation on Harmonisation of Rules, the Disclosure Framework and Private Sector Initiatives
11.1.2 Scope
11.1.3 Environmental Objectives
11.2 Criteria for Determining Whether Economic Activities Qualify as Environmentally Sustainable
11.2.1 General Overview
11.2.2 Substantial Contribution to Environmental Objectives
11.2.2.1 Substantial Contribution to Climate Change Mitigation
11.2.2.2 Substantial Contribution to Climate Change Adaptation
11.2.2.3 Substantial Contribution to the Sustainable Use and Protection of Water and Marine Resources
11.2.2.4 Substantial Contribution to the Transition to a Circular Economy
11.2.2.5 Substantial Contribution to Pollution Prevention and Control
11.2.2.6 Substantial Contribution to the Protection and Restoration of Biodiversity and Ecosystems
11.2.3 No Significant Harm to Any Other Environmental Objective
11.2.4 Compliance with Minimum Safeguards
11.3 In Particular: Requirements for Technical Screening Criteria (TSC)
11.3.1 The Considerations Set Out in the Regulation
11.3.2 The Provisions of Article 19
11.3.3 Specific Provisions
11.3.4 Obligations Imposed on the Commission
11.4 Disclosure Requirements for Environmentally Sustainable Investments
11.4.1 Considerations and Relationship to the SFDR
11.4.2 The Provisions of Articles 5–7
11.4.2.1 Disclosure of Environmentally Sustainable Investments in Pre-contractual Disclosures and in Periodic Reports
11.4.2.2 Disclosure of Financial Products that Promote Environmental Characteristics in Pre-contractual Disclosures and in Periodic Reports
11.4.2.3 Transparency of Other Financial Products in Pre-contractual Disclosures and in Periodic Reports
11.4.3 Competent Authorities—Measures and Penalties
11.4.4 The Provisions of Article 8 on Non-financial Reporting
11.5 Other Provisions
11.5.1 Advisory Bodies
11.5.1.1 The Platform on Sustainable Finance
11.5.1.2 Formalisation of the Member State Expert Group on Sustainable Finance
11.5.2 Exercise of the Delegation
11.5.3 Amendments to the SFDR
11.5.4 Review Clause
11.5.5 Start of Application
11.6 Concluding Remarks
11.6.1 A Summary
11.6.2 The Impact on Credit Institutions’ Management and Supervision of ESG Risks
12 Sustainability Disclosure in the EU Financial Sector
12.1 Introduction
12.2 Key Terms & Definitions
12.2.1 General
12.2.2 Financial Market Participants
12.2.3 Financial Advisers
12.2.4 Financial Product
12.2.5 Sustainability Risk
12.2.6 Sustainability Factors
12.2.7 Sustainable Investment
12.2.7.1 General
12.2.7.2 ‘Level 2’ Regulation: The Principle of ‘Do Not Significantly Harm’
12.2.8 Relevant Concepts Used in the Taxonomy Regulation
12.2.8.1 Environmental Objectives
12.2.8.2 ‘Do not Significantly Harm’ Versus ‘Significant Harm to Environmental Objectives’
12.2.8.3 Minimum Safeguards
12.2.8.4 Environmentally Sustainable Economic Activities
12.3 Sustainability Disclosures at Entity Level
12.3.1 General
12.3.2 Transparency of Sustainability Risk Policies on the Website
12.3.3 Transparency of Principal Adverse Sustainability Impacts on the Website
12.3.3.1 Financial Market Participants
12.3.3.2 Financial Advisers
12.3.4 Transparency of Remuneration Policies in Relation to the Integration of Sustainability Risks
12.4 Pre-contractual Sustainability Disclosures at Product Level
12.4.1 General
12.4.2 Financial Market Participants and Financial Advisers
12.4.2.1 Comply…
12.4.2.2 …or Explain
12.4.2.3 Disclosure in Accordance with Applicable Sectoral Legislation
12.4.3 Financial Market Participants
12.4.3.1 General
12.4.3.2 Pre-contractual Transparency on Whether a Financial Product Has an Adverse Sustainability Impact
12.4.3.3 Pre-contractual Transparency on Whether a Financial Product Promotes Environmental and/or Social Characteristics
12.4.3.4 Pre-contractual Transparency on Whether a Financial Product Has Sustainable Investment as Its Objective
12.5 Sustainability Disclosures at Product Level on Websites
12.5.1 General
12.5.2 Content
12.5.3 Presentation Requirements
12.5.4 ‘Level 2’ Regulation
12.6 Sustainability Disclosures at Product Level in Periodic Reports
12.6.1 General
12.6.2 Content
12.6.3 ‘Level 2’ Regulation
12.6.4 Disclosure in Accordance with Applicable Sectoral Legislation
12.7 Sustainability Disclosures and Marketing Communications
12.8 National Competent Supervisors
12.9 The Harmonising Effect of the Sustainable Finance Disclosure Regulation
12.9.1 General
12.9.2 Uniform Rules in a Regulation
12.9.3 Member State Options and Exemptions
12.9.4 Comply or Explain
12.9.5 Drafting Harmonised Rules at Level 2 and 3 is a Challenging Exercise
12.9.6 The Level 2 Rules Have Been Delayed Due to COVID-19
12.9.7 Certain Entities and Products Will Be Out of Scope—Both Now and in the Future
12.9.8 The Relationship with the Taxonomy Regulation is not Always Clear
12.9.9 Limited Availability of Raw Harmonised ESG Data
12.9.10 A Central Supervisor is Lacking
12.9.11 No Harmonisation of Liability Law
12.9.12 No Harmonisation of the Administrative Sanctioning Regime
12.10 Outlook
13 Integrating Sustainable Finance into the MiFID II and IDD Investor Protection Frameworks
13.1 Introduction
13.2 Role of the Investment Product Distributor
13.3 Main Changes to the MiFID and IDD Frameworks
13.3.1 Definitions
13.3.2 Suitability Assessment
13.3.3 Product Governance
13.3.4 Conflicts of Interests
13.4 Conclusion
13.4.1 No Cross-Sectoral Playing Field
13.4.2 Evaluation of Revised Investor Protection Rules
13.4.3 Lack of Complete Taxonomy
14 Emission Allowances as Financial Instruments
14.1 Introduction
14.2 Emission Allowances Within the Scope of Capital Markets and Financial Legislation
14.2.1 Emission Allowances in MiFID I
14.2.2 Emission Allowances in MiFID II
14.3 Emission Allowances as Financial Instruments
14.4 Emission Allowances Under Mar Regulation
14.5 Inside Information Concerning Emission Allowances
14.6 Emission Allowances in Remit Regulation
14.7 Exemptions Applicable to Emission Allowances Trading
14.8 Conclusions
Index