Series Editor’s Preface
Contents
List of Contributors
List of Figures
List of Tables
Part I General Aspects
1 Sustainable Finance in Europe: Setting the Scene
1.1 Introduction
1.2 General Aspects
1.3 Sustainable Finance and Corporate Governance
1.4 Sustainable Finance, Systemic Risk and Monetary Policy
1.5 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 The Sustainable Finance Action Plan
2.3.1 EU Classification System (‘Taxonomy’)
2.3.2 Standards and Labels for Green Products
2.3.2.1 EU Green Bond Regulation
2.3.2.2 EU Ecolabel for Retail Financial Products
2.3.2.3 Extending the Framework of Sustainable Finance Standards and Labels
2.3.2.4 Prospectus Disclosures
2.3.3 Fostering Investment in Sustainable Projects
2.3.4 Sustainability Benchmarks
2.3.5 Better Integrating Sustainability in Ratings and Market Research
2.3.5.1 Proposal for a Regulation on the Transparency and Integrity of Environmental, Social and Governance (ESG) Rating Activities
2.3.6 Clarifying Institutional Investors’ and Asset Managers’ Duties
2.3.7 Incorporating Sustainability in Prudential Requirements
2.3.7.1 Integration of Sustainability Risks and Factors in Governance, Risk Management and Fiduciary Duties Under Solvency II, IDD, UCITS, MiFID and AIFMD
2.3.7.2 Availability of Insurance Coverage: The Insurance Protection Gap
2.3.7.3 The EBA 2019 Action Plan, 2022 Roadmap on Sustainable Finance and the EBA Report on Management and Supervision of ESG Risks for Credit Institutions and Investment Firms
2.3.7.4 CRD V/CRR II
2.3.7.5 EU 2021 Banking Package (CRD VI, CRR III)
2.3.7.6 ECB
2.3.7.7 Joint Committee
2.3.8 Strengthening Sustainability Disclosure and Accounting Rule-Making
2.3.9 Fostering Sustainable Corporate Governance and Attenuating Short-Termism in Capital Markets
2.4 The Renewed Sustainable Finance Strategy
2.4.1 Financing the Transition of the Real Economy Towards Sustainability
2.4.2 Towards a more Inclusive Sustainable Finance Framework
2.4.3 Improving the Financial Sector’s Resilience and Contribution to Sustainability: The Double Materiality Perspective
2.5 Fostering Global Ambition
2.6 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 Disruptive Technologies Improve Sustainable Finance
3.6 Policy Consideration for Supporting Sustainable Digital Finance
3.7 Conclusions
Part II Sustainable Finance and Corporate Governance
4 Corporate Purpose and Sustainability Due Diligence
4.1 Introduction
4.2 Corporate Purpose and Sustainability
4.2.1 The Multiple Roles of Corporate Purpose
4.2.2 Enhancing Economic Value Under Environmental and Social Constraints
4.3 The Comparative Law of Corporate Purpose
4.3.1 The German Pluralistic Approach
4.3.2 French New Legislation and the Raison d’être of Companies
4.3.3 From Shareholder Value to Sustainable Success in Italian Corporate Governance
4.3.4 Enlightened Shareholder Value in the UK Companies Act
4.3.5 US Law
4.3.6 A Brief Comparison
4.4 The Law and Politics of Corporate Purpose
4.4.1 Is Company Law Reform Needed?
4.4.2 Should EU Corporate Law Define Directors’ Duty of Care in the Light of Sustainability?
4.4.3 Possible Strategies for Legal Reform
4.5 The Proposed Directive on Corporate Sustainability Due Diligence
4.5.1 Purpose and Scope of the Draft Directive
4.5.2 Due Diligence Obligations
4.6 Concluding Remarks
5 The Role of EU Securities Regulation in Sustainable Corporate Governance
5.1 Introduction
5.2 Framing Sustainable Corporate Governance
5.3 The Challenges of Sustainable Corporate Governance
5.4 The Role of Securities Law
5.5 Conclusion
6 Corporate Sustainability Reporting
6.1 Introduction
6.2 The Rise of Corporate Sustainability Reporting
6.2.1 From Financial Reporting to Sustainability Reporting
6.2.2 Mandatory Application of IFRS by Companies Incorporated in the EU Since 2005
6.2.3 Broadening the Scope of Corporate Reporting
6.2.4 Predecessor to the CSRD: The Non-financial Reporting Directive
6.2.5 Voluntary Frameworks for Sustainability Disclosures
6.3 The CSRD in a Broader Context
6.3.1 CSRD as Part of the EU Sustainable Finance Action Plan
6.3.2 International Initiatives
6.3.3 From Proposal for the CSRD (June 2021) to Formal Adoption of the CSRD (December 2022)
6.4 Core Elements of the CSRD
6.4.1 Scope of the CSRD and Exemptions
6.4.2 Phased-in Entry into Force
6.4.3 Assurance of Sustainability Reports
6.5 Highlights of the ESRS
6.5.1 Format and Structure of the ESRS
6.5.2 Brief Outline of the Key Topics in the ESRS
6.5.2.1 Cross-Cutting Standards
6.5.2.2 Topical Standards: E
6.5.2.3 Topical Standards: S
6.5.2.4 Topical Standard: G
6.6 Closing Remarks
7 Integrating Sustainability in EU Corporate Governance Codes
7.1 Introduction
7.2 Corporate Governance Codes: The EU Approach
7.3 EU Approach to Sustainable Development and the Need for a Sustainable Corporate Governance
7.4 Methodology
7.5 Findings
7.5.1 The Purpose of Corporate Governance and of Codes
7.5.2 CSR/Sustainability
7.5.2.1 Sustainable Success
7.5.2.2 Sustainable Development/Value Creation/Sustainable Long-Term Value
7.5.2.3 Corporate Social Responsibility (CSR)
7.5.2.4 Stakeholders
7.5.3 Stakeholders
7.5.4 Employees
7.5.5 Gender Diversity
7.5.6 Sustainability/CSR Committee
7.5.7 Compensation and Sustainability
7.5.8 Sustainability Reporting
7.5.9 Ethics
7.6 Final Remarks and Future Steps
Part III Sustainable Finance, Systemic Risk & Monetary Policy
8 Climate Change as a Systemic Risk in Finance: Are Macroprudential Authorities Up to the Task?
8.1 Introduction
8.2 Climate Change as a Source of Financial Instability
8.3 What Role for Macroprudential Policy?
8.3.1 Systemic Risk and its Macroprudential Assessment
8.3.2 Challenges Associated with CRFR: Methodology, Data and Timing of Policy Action
8.3.2.1 Methodological Approaches to Assess CRFR
8.3.2.2 Timing of Policy Action
8.4 Addressing CRFR with the Macroprudential Toolkit
8.4.1 Capital-Based Tools
8.4.2 Borrower-Based Tools
8.5 Conclusions
9 Prudential Requirements for ESG Risks of Banks
9.1 Addressing ESG Risks by Banks
9.2 Qualitative Risk Management Organisation
9.2.1 Introduction
9.2.2 Existing Framework CRD4
9.2.3 The 2021 EBA ESG Report
9.2.3.1 Fulfilling the EBA’s Mandate—Definitions of Climate, Physical or Transition Risks
9.2.3.2 Limits to Double Materiality
9.2.3.3 Bottlenecks in Risk Management Development
9.2.3.4 Risk Drivers and Transmission Channels of Climate and Environmental Risks
9.2.3.5 Quantitative and Qualitative Methods
9.2.4 ECB Guide on Climate-Related and Environmental Risks
9.2.4.1 An Activist ECB
9.2.4.2 The Thirteen ECB Risk Management Expectations
9.2.4.3 Comparison to the 2021 EBA ESG Report
9.2.4.4 The ECB’s Thinking on Risk Management
9.2.5 Basel Committee Risk Management and Supervision Principles
9.2.5.1 Late Creation of Basel Committee on Principles
9.2.5.2 Basel Committee Principles
9.2.5.3 Twelve Principles for Banks
9.2.5.4 The Role of the Regulator
9.2.6 The New Rules Arising from CRD6
9.2.6.1 Introduction
9.2.6.2 CRR Definitions of Environmental, Social and Governance Risk
9.2.6.3 Bank-Focused Risk Management Provisions
9.2.6.4 Review of Risk Management by Competent Authority
9.2.6.5 Political Negotiations on CRD6
9.2.7 Concluding Remarks
9.3 Pillar 1 Capital Requirements to Address ESG Risks
9.3.1 Introduction
9.3.2 Green Support Factors for Sustainable Finance
9.3.2.1 Incentivising Sustainable Finance
9.3.2.2 Support Factor Framework of CRR3
9.3.3 Studies of the Network on Greening the Financial Sector (NGFS)
9.3.3.1 Introduction
9.3.3.2 The Expert Opinion Reports Organised by the NGFS
9.3.4 Environmental and Social Risks in the European Prudential Framework
9.3.4.1 Introduction
9.3.4.2 The Broader Conceptual Approach of Designing Pillar 1 Requirements
9.3.4.3 ESG Risks and Relation to Credit Risk
9.3.4.4 ESG Risks and Relation to Market Risk
9.3.4.5 ESG Risks and Relation to Operational Risk
9.3.4.6 ESG Risks and Relation to Concentration Risk
9.3.5 Concluding Remarks
10 The Role of Prudential Regulation and Supervision of Insurers in Sustainable Finance
10.1 Introduction
10.2 Setting the Scene: The Objective of Insurance and Insurance Supervision in Relation to Sustainable Finance: The Prudent Person Principle, Underwriting Risks and the Insurance Protection Gap
10.2.1 International Level
10.2.2 European Union
10.2.2.1 European Commission Action Plan
10.2.2.2 EIOPA
10.2.2.3 Integration of Sustainability Risks and Factors in the Solvency II Delegated Regulation, Focus on Pillar 2
10.2.2.4 Amendments to the Solvency II Directive, Moving the Focus to Pillar 1
10.3 Climate Change Transition Plans
10.4 Concluding Remarks
11 The ECB’s New Green Monetary Policy
11.1 Introduction
11.2 The ECB’s New Green Monetary Policy
11.2.1 Premises
11.2.2 Objectives and Content
11.3 Legal Framework for a Green Monetary Policy in the Eurozone
11.3.1 The ECB’s Mandate
11.3.1.1 Price Stability (Primary Objective)
11.3.1.2 Support of General Economic Policies in the Union (Secondary Objective)
11.3.1.3 Contribution to the Stability of the Financial System
11.3.2 Limits to the Use of Competences
11.3.2.1 Proportionality and Its Procedural Safeguards
11.3.2.2 The Principle of an Open Market Economy
11.3.2.3 Obligation to Respect Fundamental Rights
11.3.2.4 Institutional Balance
11.3.3 Obligation to Pursue a Green Monetary Policy
11.3.3.1 Integration of “Environmental Protection Requirements”
11.3.3.2 Environmental Protection as a Principle for the Policies of the Union Under the CFR
11.3.3.3 International Obligations, Consistency and Loyal Cooperation
11.3.3.4 Obligation to Respect Fundamental Rights
11.4 Measures and Instruments
11.4.1 Assessments, Data and Disclosures
11.4.2 Credit Operations
11.4.3 Collateral Framework
11.4.4 Asset Purchases
11.4.5 Minimum Reserve Requirements
11.5 What Role for the ECB in the Fight Against Climate Change?
Part IV Sustainable Finance and Financial Markets
12 Sustainable Finance: An Overview of ESG in the Financial Markets
12.1 Introduction
12.2 ESG Products in the Financial Markets
12.2.1 Meaning and Standards of ESG/Sustainable Finance Generally
12.2.2 Green, Social and Sustainability(-Linked) Loans and Bonds
12.2.3 ESG Market Infrastructure
12.3 The Legal Framework Applicable to ESG in the Financial Markets
12.3.1 Corporate Governance
12.3.2 Supervisory Practices and Prudential Supervision
12.3.3 Non-financial Reporting: NFRD, CSRD and ESRS
12.3.3.1 Non-financial Reporting Directive (NFRD)
12.3.3.2 Corporate Sustainability Reporting Directive (CSRD)
12.3.3.3 European Sustainability Reporting Standards (ESRS)
12.3.4 Taxonomy Regulation
12.3.5 Sustainable Finance Disclosure Regulation
12.3.6 EU Climate Benchmarks
12.3.7 MIFID II Amendments
12.3.8 Investments and Insurance (UCITS, AIFMD, IDD)
12.3.9 Sustainable Finance Package 2023
12.4 Upcoming Legislative and Regulatory Developments
12.4.1 Corporate Sustainability Due Diligence
12.4.2 EU Green Bond Regulation
12.4.3 The Proposed ESG Rating Regulation
12.4.4 Sustainable Securitisations
12.4.5 Ecolabel for Retail Financial Products
12.5 Greenwashing in the Financial Markets
12.6 Climate Litigation in the Financial Markets
12.7 Concluding Remarks
13 The Taxonomy Regulation and Its Implementation
13.1 Subject Matter and Scope of the Regulation—Environmental Objectives
13.1.1 Subject Matter
13.1.1.1 Introductory Remarks
13.1.1.2 The Confines Set by Primary EU Law
13.1.1.3 The Considerations Set Out in the Regulation on Harmonisation of Rules, the Disclosure Framework and Private Sector Initiatives
13.1.2 Scope
13.1.3 Environmental Objectives
13.2 Criteria for Determining Whether an Economic Activity Qualifies as Environmentally Sustainable
13.2.1 General Overview
13.2.2 Substantial Contribution to Environmental Objectives
13.2.2.1 Substantial Contribution to Climate Change Mitigation
13.2.2.2 Substantial Contribution to Climate Change Adaptation
13.2.2.3 Substantial Contribution to the Sustainable Use and Protection of Water and Marine Resources
13.2.2.4 Substantial Contribution to the Transition to a Circular Economy
13.2.2.5 Substantial Contribution to Pollution Prevention and Control
13.2.2.6 Substantial Contribution to the Protection and Restoration of Biodiversity and Ecosystems
13.2.3 No Significant Harm to any Other Environmental Objective
13.2.4 Compliance with Minimum Safeguards
13.3 In Particular: Requirements for Technical Screening Criteria (TSC)—Delegated Acts Adopted and to Be Adopted
13.3.1 The Considerations Set Out in the Regulation
13.3.2 The Provisions of Article 19
13.3.3 Specific Provisions
13.3.4 Obligations Imposed on the Commission
13.3.5 Delegated Acts Adopted and Related Commission Communications
13.3.5.1 The Provisions of Article 27(2) TR
13.3.5.2 The 2021 “Taxonomy Climate Delegated Act”
13.3.5.3 The 2022 “Complementary Climate Delegated Act”
13.3.5.4 The Ongoing Agenda
13.4 Disclosure Requirements for Environmentally Sustainable Investments
13.4.1 Considerations and Relationship to the SFDR
13.4.2 The Provisions of Articles 5–7
13.4.2.1 Disclosure of Environmentally Sustainable Investments in Pre-contractual Disclosures and in Periodic Reports
13.4.2.2 Disclosure of Financial Products that Promote Environmental Characteristics in Pre-contractual Disclosures and in Periodic Reports
13.4.2.3 Transparency of Other Financial Products in Pre-contractual Disclosures and in Periodic Reports
13.4.3 Competent Authorities—Measures and Penalties
13.4.4 The Provisions of Article 8 on Non-financial Reporting
13.4.5 The 2022 Corporate Sustainability Reporting Directive (CSRD)
13.5 Other Provisions
13.5.1 Advisory Bodies
13.5.1.1 The Platform on Sustainable Finance
13.5.1.2 Formalisation of the Member State Expert Group on Sustainable Finance
13.5.2 Exercise of the Delegation
13.5.3 Amendments to the SFDR
13.5.4 Review Clauses
13.6 Concluding Remarks
14 Sustainability Disclosure in the EU Financial Sector
14.1 Introduction
14.1.1 The Aim of This Chapter
14.1.2 Sustainable Finance Action Plan
14.1.3 Taxonomy Regulation
14.1.3.1 General
14.1.3.2 Six Environmental Objectives
14.1.3.3 Criteria for Environmentally Sustainable Economic Activities
14.1.3.4 Taxonomy Climate Delegated (Amendment) Act
14.1.4 Sustainable Finance Disclosure Regulation (SFDR)—Overview
14.1.4.1 General
14.1.4.2 Financial Market Participants and Financial Advisers
14.1.4.3 Reliable Sustainability-related Company Information
14.1.4.4 The Structure of the Remainder of This Chapter
14.2 Disclosures at Entity Level
14.2.1 General
14.2.2 Transparency of Sustainability Risk Policies on the Website
14.2.3 Financial Market Participants: Transparency of Principal Adverse Sustainability Impacts on the Website
14.2.3.1 Comply…
14.2.3.2 … or Explain
14.2.4 Financial Market Participants above a Certain Size
14.2.5 Financial Advisers: Transparency of Principal Adverse Sustainability Impacts on the Website
14.2.5.1 Comply…
14.2.5.2 …or Explain
14.2.6 Transparency of Remuneration Policies in Relation to the Integration of Sustainability Risks
14.3 Pre-contractual Disclosures at Product Level
14.3.1 General
14.3.2 Disclosure in Accordance with Applicable Sectoral Legislation
14.3.3 Sustainability Risks
14.3.3.1 Comply…
14.3.3.2 …or Explain
14.3.4 Article 6 Product
14.3.5 Financial Market Participants: Additional Pre-contractual Disclosures
14.3.6 Financial Market Participants: Transparency on Adverse Sustainability Impact
14.3.6.1 Comply…
14.3.6.2 …or Explain
14.3.7 Financial Market Participants: Article 8 Products
14.3.7.1 General
14.3.7.2 Methodology Used for the Relevant Indices
14.3.8 Financial Market Participants: Article 9 Products
14.3.8.1 General
14.3.8.2 Reduction of Carbon Emissions
14.3.8.3 Methodology Used for the Relevant Indices and Benchmarks
14.4 Disclosures at Product Level on Websites
14.4.1 General
14.4.2 Content
14.4.3 Presentation Requirements
14.5 Sustainability Disclosures at Product Level in Periodic Reports
14.5.1 General
14.5.2 Content
14.5.3 Disclosure in Accordance with Applicable Sectoral Legislation
14.6 Sustainability Disclosures and Marketing Communications
14.7 National Competent Supervisors
14.8 The Harmonizing Effect of the SFDR
14.8.1 General
14.8.2 Uniform Rules
14.8.3 Member State Options and Exemptions
14.8.4 Comply or Explain
14.8.5 Certain Entities and Products Will Be Out of Scope—Both Now and in the Future
14.8.6 A Central Supervisor Is Lacking
14.8.7 No Harmonization of Liability Law
14.8.8 No Harmonization of the Administrative Sanctioning Regime
14.9 Outlook
15 Adverse Impact Indicators as a Measure of ESG Risk? Asset Management Approaches to the Integration of ESG Risk in the Investment Process and Their Interaction with the due Diligence Process in the Context of the SFDR
15.1 SFDR and the Management of Adverse Impacts
15.2 SFDR and Sustainability Risks
15.3 Conclusions
16 ESG Ratings Agencies: The Emerging Power
16.1 Introduction
16.2 The ESG Rating Space
16.3 Europe Leading the Way, but Which Way?
16.4 The European Proposal
16.5 Conclusions and Recommendations
17 Integrating Sustainable Finance into the MiFID II and IDD Investor Protection Frameworks
17.1 Introduction
17.2 Role of the Investment Product Distributor in Remedying Investors’ “Value-Action-Gap”
17.3 Critical Overview of Main Changes to the MiFID and IDD Frameworks
17.3.1 Introduction
17.3.2 Definitions
17.3.2.1 Sustainability Factors and Sustainability Risks
17.3.2.2 Sustainability preferences.
17.3.3 Suitability Assessment
17.3.3.1 Background
17.3.3.2 Providing Information to Clients
17.3.3.3 Obtaining Client/Customer Information
17.3.3.4 Staff’s Understanding of Financial Products
17.3.3.5 Matching Clients with Products
17.3.3.6 Matching Clients with Products
17.3.3.7 Transitional Measures—Periodic Assessment
17.3.3.8 Evaluation
17.3.4 Product Governance
17.3.4.1 Background
17.3.4.2 Scope of Target Market Obligations Relating to Sustainability
17.3.4.3 Obligations for Manufacturers
17.3.4.4 Obligations for Distributors
17.3.4.5 Obligations for Manufacturers and Distributors
17.3.4.6 Evaluation
17.3.4.7 Conflict of Interest
17.4 Conclusion
17.4.1 Evaluation of Revised Investor Protection Rules
17.4.2 No Cross-Sectoral Playing Field
17.4.3 Uneasy Fit with Taxonomy and SFDR
18 Capital Markets Legislation and Emission Allowances: A Fruitful Marriage?
18.1 Introduction: Trading in EUAs
18.2 ETS and Governance of Emissions
18.3 Emission Allowances Within the Scope of Capital Markets and Financial Legislation
18.3.1 Emission Allowances in MiFID I
18.3.2 Emission Allowances in MiFID II
18.3.3 Emission Allowances Under MAR
18.3.4 MAR: Inside Information Concerning Emission Allowances
18.3.5 MiFID, MAR and REMIT
18.3.6 Exemptions Applicable to Emission Allowances Trading
18.3.7 The Impact of MiFID II
18.4 Pros and Cons
18.5 Conclusions
Index