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