Fifteen Eighty Four

1. What are we talking about?

In recent years, sustainability and sustainable finance have become central public and academic debates. A growing number of laws, policies, and regulations have been introduced to steer private finance towards environmental, social, and governance (ESG) objectives. Investors are increasingly moving towards ESG-compliant assets, and financial products labelled as sustainable are being included in consumer portfolios. However, the actual ability of these products to generate positive impacts on the environment or society remains difficult to quantify. The ongoing shifts in political discourse and policies across the globe testify to the fact that the debate is far from settled.

The European Union has emerged as the most active jurisdiction in shaping this process towards sustainable finance regulation. Sustainable finance has gained prominence in the European Union following major international agreements, notably the Paris Agreement on climate change (2016) and the United Nations Sustainable Development Goals (SDGs). These agreements paved the way for a plurality of initiatives, culminating in the EU Green Deal (2019), a comprehensive legislative package to support the transition to a sustainable green economy, with a particular focus on businesses and the financial sector. The EU’s sustainable agenda continued to evolve in the following years, receiving a significant push from the role occupied within Next Generation EU in addressing the socio-economic crisis arising from COVID-19, and further extending to new policy initiatives.

EU legislation influences legislative and regulatory developments in many countries outside Europe. Not only can this legislation serve as a model for future reforms worldwide, but the EU regimes for the recognition of equivalence (or, in some cases, for the endorsement) of activities based outside the Union will inevitably have an impact on third-country service providers wishing to enter EU financial markets.

These policy developments, driven, in part, by the ambition of the EU to establish itself as a “regulatory superpower”, have sparked a major debate across the Atlantic and globally regarding whether financial regulation and corporate governance should integrate climate and ESG concerns into day-to-day risk management and business practices. The United States has shown less legislative enthusiasm in promoting sustainable finance, while the United Kingdom is forging its path following its departure from the EU. Nonetheless, this more cautious approach has not hindered the growth of sustainable finance by market actors in these countries.

The debate hasn’t died down and is currently evolving.  While until recently one of the key questions was whether the “sleeping beauty”, the US – and with it the UK – would wake up and join this new regulatory drive, the debate has now shifted within the EU itself, as the Commission’s new focus on competitiveness creates the need to reconcile with its previous policy commitments to sustainability.

• Objectives and key elements of the Handbook

Amidst this heated debate, the Cambridge Handbook of EU Sustainable Finance: Regulation, Supervision and Governance provides an essential tool to shed light on the complex system of sustainable finance, resulting from these years of legislative frenzy, changing market practices and academic efforts.

The aim of the Handbook is to provide the reader with relevant knowledge and analytical tools to better understand and critically reflect on the key issues and choices raised by the new legislative and regulatory developments in the area of ESG and sustainable finance.

The Handbook doesn’t assume a partisan stance but aims to provide different perspectives in understanding the intricacies of the law and regulation of sustainable finance. While the authors express their own views on specific aspects, the Handbook as a whole presents a balanced view of sustainable finance, highlighting both its opportunities and risks.

The Handbook enables readers to develop their own opinions on a wide range of specialised topics, including financial regulation, corporate governance, capital markets law, and financial technology (Fintech). The Handbook consequently offers an in-depth analysis of critical EU legislation, such as the Taxonomy Regulation, the EU Green Bond Standard, the Sustainable Finance Disclosure Regulation (SFDR), the Corporate Sustainability Reporting Directive (CSRD), the amendments to the Benchmark Regulation (extending its application to Climate Benchmarks) and the recently approved Regulation on ESG Rating Providers.

In each chapter, the Handbook explores how ESG challenges are reshaping our understanding of corporate governance, banking and financial regulation. It enables the reader to understand the relationships and tensions between the traditional rationales of financial regulation, supervision and governance, and the new regulatory objectives.

The Handbook focuses largely on the legal framework of the European Union, where, as noted above, most of the recent legal and regulatory developments in sustainable finance have taken place. However, in line with its overall approach, the Handbook also provides a comparative analysis between the EU and other countries outside Europe, such as the United States, to enable the reader to understand and critically compare the different regulatory choices of other influential jurisdictions.

• The structure of the Handbook

The Handbook comprises five parts. Part I investigates the relationship between finance and sustainability in general terms, offering a broad analysis of the risks of unsustainability beyond the established scope of financial risks related to climate change. Part II examines how the new concerns on sustainability and business ethics meet traditional theories on corporate governance and corporate conduct. Part III looks at the evolving relationship between capital markets and their traditional institutions on the one hand, and the emerging trends in sustainability and ESG-related preferences on the other. Part IV examines the relationship between sustainability and financial stability, considering multiple perspectives: from macro and micro-level prudential regulation to sectoral regimes (such as banking and insurance regulation) to in the multilevel interaction between financial tools. Part V focuses on the relationship between sustainability and financial innovation, exploring instruments such as emission allowances, green derivatives, skin-in-the game bonds, and the impact of digitalisation on sustainable finance.