Information as a Driver of Sustainable Finance: The European Regulatory Framework (Palgrave Studies in Impact Finance)

The Sustainable Development Goals introduced by the United Nations in 2016 call for the significant mobilisation of finance. However, although sustainable investments are steadily increasing, there still remain large gaps within financing and the information that financial markets rely on is often incomplete or incorrect. For instance, the financial system has been structured around short-term frameworks and goals while the most pressing environmental and social challenges are long-term. Prices do not convey the cost of externalities associated with social and environmental challenges. It is therefore important to implement the effective pricing of externalities and create a common language and taxonomy between investors, issuers and policy-makers in order to best serve sustainable development. Addressing this challenge, the authors delve deeper into the levers that can be pulled within the financial system to prompt an efficient ecosystem of sustainability-related information, allowing social and environmental externalities to be incorporated into the decision-making process of all market agents. Incentives needed for investors, issuers and intermediaries are proposed along with regulation that can trigger these incentives. This book offers a comprehensive collection of chapters which explore the ongoing evolution of the European regulatory framework, providing essential reading for policymakers, practitioners and researchers alike. Foreword by Carmine Di Noia Foreword by Mario Nava Contents Notes on Contributors List of Figures List of Tables List of Boxes 1 Introduction Part I Sustainable Finance: The Conceptual Framework 2 Sustainable Growth in the European Framework and the Role of Finance Introduction Conceptual Framework Sustainable Development and the ESG Factors The Concept of Sustainable Finance The Concept of Sustainable Investing The EU Holistic Approach to Sustainable Development Policy Actions in the Framework of the EU Green Deal A Sustainable Recovery Recent Developments in ESG Markets Conclusions References 3 Information as a Driver of Sustainable Finance Introduction The Ecosystem of Sustainable Information Market Prices and ESG Factors Market Pricing of ESG Factors Market Pricing of Risks and Opportunities of Climate Changes Why Markets May Fail in Pricing ESG Factors From the Efficient Market Hypothesis (EMH) to the Adaptive Market Hypothesis (AMH) References Part II The Information as a Trigger: Market Failures and Regulatory Issues 4 Corporate Disclosure Introduction The Corporate Disclosure Landscape as Non-financial Information Becomes Paramount Companies’ Necessity to Communicate the Building Blocks of Their Licence to Operate The Unfolding Scenario of Non-financial Reporting and ESG Disclosure Towards a Simplified Scenario of ESG and Value Creation Disclosure: The IIRC-SASB Merger The Non-financial Reporting Directive The Scope of the NFRD Non-financial Reporting in the Context of Periodic Financial Information The Concept of Materiality in the Non-financial Statement and Its Application The Requirements to Disclose Non-financial Matters and Their Application Corporate Disclosure and Long-Term Shareholder Engagement: The Review of the Shareholder Rights Directive and the New Provisions in the Area of Directors’ Remuneration Directors’ Remuneration: The Rationale for Policy Measures New SRD II Provisions in the Area of Directors’ Remuneration Final Remarks Concerning ESG Corporate Disclosures References 5 Third Parties Information Eugenics of Non-financial Information The Double Genesis of Non-financial Information As for the Reliability of Primary Information As for the Business Model Adopted for the Production of Non-financial Information As for the Correct Use of Non-financial Information As for the Significance of an ESG Rating Industry Third Parties’ Non-financial Information: A Systematic Literature Review ESG Indexes and Ratings Sustainability Assessment Process ESG Information and Market Reaction Concerning the Business Model of Third Parties’ Information Providers Investor-Pay Model vs Applicant-Pay Model in Non-financial Recommendations The Case of Standard Ethics Discussion: The Road to the Future Structure of the Non-financial Information Market However, What Information Do Investors Actually Receive from ESG Rating Providers for the Decision-Making Process? However, is the Information that Investors Are Demanding to Make Their Investment Decisions in the Current Context of Global Risks? References 6 ESG Factors in the Investment Process Introduction ESG Factors and Sustainable Investing Sustainable Investing: The Context Sustainable Investing Strategies ESG Fund Market Trends The ESG Manager and the Decision-Making Process The Decision-Making Process in the UCITS Directive and the AIFMD The Engagement in the Investee Companies The Asset Owner: ESG Products and the Role of the Benchmark Management Approaches (Active vs Passive) and Investment Policy The Peculiarities of ESG Products The Benchmark Regulation and Its Amendments to Include Climate-Related Benchmarks The Main Challenges ESG Funds ESG Ratings and ESG Funds References 7 Retail Investors’ Attitude and Preferences and Sustainable Investing Regulation Introduction Retail Investor Attitude Towards Sustainable Investments Motivation of Responsible Investing Individual Characteristics The Gap Between Self-Reported Attitude and Actual Behaviour EU Regulation and Retail Investors’ Sustainable Investments A General Framework of Retail Investors’ Regulation Targeting Retail Investors to ESG Investments in the New EU Regulation Concluding Remarks References Part III Current Developments in the European Regulatory Framework 8 Financial Regulation for Sustainable Finance in the European Landscape Introduction The 2018 Sustainable Finance Action Plan Reorienting Capital Flows Towards a More Sustainable Economy Mainstreaming Sustainability into Risk Management Fostering Transparency and Long-Termism The EU Taxonomy for Sustainable Activities—The Need for a Common Definition Structure and Features of the EU Taxonomy Uses of the EU Taxonomy From the Taxonomy to the Taxonomies? Sustainability-Related Disclosures The New Corporate Sustainability Reporting Directive (CSRD) The Sustainable Finance Disclosure Regulation (SFDR) The Taxonomy Regulation (TR) The Capital Requirements Regulation (CRR) and the Investment Firms Regulation (IFR) The European Single Access Point (ESAP) The Delegated Legislation Integrating Sustainability into UCITS Directive and AIFMD The Strategy for Financing the Transition to a Sustainable Economy Science-Based Regulation References 9 Future Perspectives on Sustainable Corporate Governance and Disclosures Corporate Disclosures The Scope of Application of the Non-financial Reporting Requirements The Location of the Non-financial Information Materiality and Standardisation Digitisation of the Sustainability Reporting Enforcement and Assurance Corporate Governance From Corporate Disclosures to Governance: The Sustainable Corporate Governance Initiative The Analytical Work Behind the Sustainable Corporate Governance Initiative The Study on Directors’ Duties The Study on Due Diligence Obligations EU Policy Actions Under the Sustainable Corporate Governance Initiative References 10 Transparency and Standardization of Financial Products Information Introduction The Retail Use-Case for Sustainability Information The EU Sustainable Finance Retail Strategy as Part of the EU Action Plan The Delegated Regulation to MiFID II on the Integration of ESG Considerations in the Suitability Test Implications of the Delegated Regulation Overview of the EU Toolbox Supporting the Retail Use-Case Standardization of Product Disclosures Under the SFDR ESG Disclosures for Benchmarks Under the Benchmarks Regulation EU Climate Benchmarks Product-Level Taxonomy Disclosures The EU Ecolabel for Financial Products The EU Green Bond Standard Case Study: The Draft Templates for Product Disclosures Under the SFDR Concluding Remarks References 11 Conclusions References Postface Index