Sustainable Finance in Europe: Corporate Governance, Financial Stability and Financial Markets (EBI Studies in Banking and Capital Markets Law)

This second edition brings together the views of expert academics and practitioners on the latest regulatory developments in sustainable finance in Europe and includes 5 new chapters on sustainable remuneration, reporting, lending, green monetary policy and ESG. The volume includes a wide range of cutting-edge issues, which relate to three main themes along which the volume is structured: (1) corporate governance; (2) monetary policy and financial stability ; and (3) financial markets. With individual contributions deploying different methods of analysis, including theoretical contributions on the status quo of macro-financial research as well as law and economics approaches, the collection encourages interdisciplinary readership and will appeal to those researching capital markets law, European financial law, and sustainable finance, as well as practitioners within the finance industry. 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