The enactment of the European Non-Financial-Reporting-Directive (2014/95/EU) and the new (proposed) Corporate-Sustainability-Reporting-Directive as its successor introduced aspects of corporate social responsibility to the world of financial reporting for almost all listed corporations in the common market. This established a path dependency between the traditional financial and the (new) non-financial reporting regime. As the consequence, the actual non-financial reporting regime does not provide a unique scope of application and does not distinguish between business entities with and without an impact on corporate social responsibility. Nevertheless, the actual content of financial reporting and non-financial reporting is fundamentally different since financial information is a number-based information instrument and sustainability information is a text-based information instrument. Moreover, financial information and non-financial information do not require the same corporate governance procedure for drafting and examining. Finally, it is doubtful that the liability regime of financial disclosure can be used as some kind of blueprint for a civil liability regime for non-financial disclosure. Since the existing framework for civil liability in financial disclosure cannot be used for cases of incorrect non-financial disclosure, it is necessary to develop an independent regime of civil liability for incorrect non-financial disclosure. The existing path dependency between financial and non-financial disclosure prevents this necessary step.

This chapter focusses on environmental sustainability and provides a better understanding of the corporate governance levers that can direct behaviours towards environmental goals. We explore the relationship between risk culture and board members’ intention to adopt pro-environment strategies (PES) through individual beliefs. These factors, according to Ajzen’s theory of planned behaviour (ATPB), refer to what is convenient to do to achieve expected findings (behavioural beliefs), what should be done as required by regulators and induced by stakeholders’ pressure (normative beliefs) and the conviction of possessing skills, resources and opportunities to perform a specific behaviour (control beliefs). According to ATPB, behavioural beliefs, normative beliefs and control beliefs represent, in turn, predictors of an individual’s attitudes, subjective norms and perceived control beliefs. All these variables affect the intention to perform a behaviour and, in this case, to adopt pro-environmental strategies. The research analyses data obtained from a survey of 120 Italian board members, using a partial least square methodology to test the relationship between individual risk culture and beliefs, attitudes and norms and, finally, intention to adopt PES. Our findings add to previous work on the role of risk culture and provide a new theoretical perspective to guide green policy and changes aimed at increasing environmental sustainability.

The chapter analyses disclosure obligations of environmental and social sustainability risks that apply to companies in light of the growing importance to disclose sustainability risks. In doing so, it discusses the potential cross-border strategies for countries to develop international standards to support global convergence. It considers the international developments justifying the rationale for sustainability-related disclosures along with a discussion of the three models of cross-border disclosure regulation: (i) the home state approach, (ii) the host state approach and (iii) the equivalence approach. The chapter argues that the EU Corporate Sustainability Reporting Directive (CSRD) (2022) has adopted a mix-and-match model between the host state approach and the equivalence approach. Our analysis emphasises the extraterritoriality of EU sustainability disclosure regulation and compares it with the models followed by the United Kingdom, the United States and Switzerland. The different sustainability disclosure requirements between EU countries and non-EU countries suggests, therefore, that cross-border regulatory coordination is important. The paper recommends a model of ESG disclosure for capital markets that is based on the EU policy of equivalence modified by a recognition of the compliance approaches of certain foreign jurisdictions.

This chapter documents the parallel paths the US, UK, and EU have taken in transmuting voluntary corporate ESG commitments into hard law – statute, regulation, and judicial precedent.Whereas stakeholder capitalism was originally the province (mainly) of academics, international organizations, and special interest groups, in the years immediately preceding the 2020 pandemic, major businesses worldwide publicly declared their commitment to the so-called stakeholder model in the US, UK, and in continental Europe. These corporate behaviours were encouraged by proxy advisors andinstitutional investors.The chapter questions the extent to which the current generation of ESG-stakeholderism is in fact a sustainable business practice, capable of maintaining its current pace over a longer-term horizon. We also discuss how voluntary corporate ESG commitments have, over a short period of time, hardened into more formal sources of law and regulation, with examples from the US, EU, and UK. In conclusion, we identify some adverse consequences to this trend.

We introduce a novel sustainable capital instrument: the skin-in-the-game bond. With features inspired by contingent convertibles (CoCos), this bond is an alternative for the green, social, sustainability and sustainability-linked bonds available on the market. A skin-in-the-game bond is linked to the performance of a benchmark that relates to the broad concept of sustainability in at least one of its pillars, being the environment (E), society (S) or corporate governance (G). When the benchmark hits a preset trigger level, (part of) the bond’s face value is withheld and directed into a government-controlled fund by the issuer. The skin-in-the-game bond offers a higher yield to investors than a standard corporate bond, in order to compensate for the risk of losing out on (part of) the investment. Both issuer and investor have skin-in-the-game; the embedded financial penalty incentivizes the preservation of a favourable benchmark value. In this work, we elaborate on the general concept of a skin-in-the-game bond, as well as on a tailored valuation model, illustrated by two examples: the ESG and nuclear skin-in-the-game bonds.

The chapter assesses the extent of integration of sustainable finance into the MiFID II and the IDD investor protection frameworks. The chapter explains why retail investors do not always act upon their investment preferences and the role of the investment product distributor in remedying investors’ value-action gap. The chapter discusses the main changes to the MiFID II and IDD frameworks by analysing the new sustainability-related definitions, the amended product suitability assessment, the amended product governance process, and the amended conflicts of interest procedure. The analysis argues that full cross-sectional consistency will not be achieved in the EU investor protection framework as only the MiFID II and IDD frameworks have been amended while rules covering other product distributors remain the same. It also highlights the problems of inconsistency caused by sustainable finance amendments to existing legislation, including when it comes to applying the definition of sustainability preferences, which refer to concepts of the Taxonomy Regulation and the Sustainable Finance Disclosure Regulation, and the lack of a complete Taxonomy covering social and governance perspectives in the amended MiFID II and IDD obligations.

The chapter explains the importance of stakeholder relations in supporting the achievement of Sustainable Development Goals, focussing on the essence of stakeholder engagement management in financial firms, for in their case, relational capital is of particular importance, given the importance of mutual trust between an entity and its stakeholders. We begin by explaining the concept of interest groups, linked to contract theory and corporate social responsibility. Both the micro context (corporate stakeholder theory) and the macro context (the concept of stakeholder capitalism) are pointed out. Contemporary corporate governance codes emphasise a company’s accountability to a wide range of its stakeholders, which is especially important in the case of financial firms – due to the specific nature of their activities. Therefore, different dimensions of financial institutions’ responsibilities are discussed, stressing those aspects that justify strengthening stakeholder relationship management in those firms. The chapter emphasises the process of managing relationships with stakeholders. The core part is a discussion of the key stages of stakeholder engagement management: from the identification of main interest groups, their analysis and segmentation, prioritisation of stakeholders, and selection of an engagement strategy, to monitoring and evaluation of engagement.

The question of whether ‘specialist’ securities such as use-of-proceeds green bonds should be subject to a greater level of regulation has attracted considerable attention among policymakers and market actors. Much is at stake, especially because the green bond market has seen significant growth over the years. In this chapter we consider the role that EU prospectus disclosure regulation should play in relation to instruments such as green bonds. We examine the rationale for mandatory prospectus regulation and consider the role played by different market initiatives that have hitherto filled the regulatory gap. We are critical of current practices and argue in favour of mandatory ‘green bond’ prospectus requirements.

This chapter analyses the EU Sustainable Finance Disclosure Regulation (SFDR) by proposing that we should think about the SFDR as a layered system of sustainability-related disclosures, which combine the concepts of “single materiality” and “double materiality”. The authors offer a new perspective on popular proposals to turn the SFDR into a labelling scheme but argue that supervisors should avoid such avenues. The chapter emphasises that it is not the definition of “sustainable investment” which is relevant, but the additional disclosure requirements that apply as soon as a financial market participant deems its financial product to be in line with the definition. The SFDR encourages robust internal assessments over blind reliance on opaque ESG rating agencies and provides financial market participants with the freedom to justify what a contribution to an environmental or social objective means. This freedom sets it apart from a labeling mechanism with a clearly defined threshold of what a contribution should entail. The chapter also analyzes proposed guidelines by ESMA for regulating the names of investment funds that involve sustainable investment, and concludes that those guidelines do not create a clear labelling regime.

Chapter 22 analyzes whether and to what extent sustainability can be integrated into EU fit and proper testing for members of the management body of banks, insurers and investment companies. It concludes that (prospective) members should indeed have sufficient knowledge, skills and expertise in sustainability, both as a collective and individually. The extent to which this knowledge is required depends on the institution and the specific role and responsibilities of the director. However, every director must have basic sustainability knowledge and expertise to adequately perform his or her role. It is argued that EU supervisors, including the ECB, should use the fit and proper test, or at least engage in serious dialogue with financial institutions, to ensure that there is sufficient ESG expertise in the management body. This is well within their mandate since core prudential values such as the solidity of the institution and stability of the financial sector may be at stake. To ensure a level playing field within the EU, it is recommended that EU regulators set out more specific requirements regarding ESG expertise in Level 1 or 2 legislation. This would also provide greater legal certainty for financial institutions and (proposed) members of the management body.

The introduction provides an overview of the reasons why sustainable finance is high in the regulatory agenda, in the EU and increasingly elsewhere. It shows how the EU started to follow up on the UN goals for a more sustainable development, and how it translated those goals, first into its action plans and then into regulatory measures. The case for sustainability as a tool to manage climate and environmental risks is then explained. The introduction then summarises the contents and the main results of each chapter within the collection.

There is a large body of academic literature about financial inclusion and financial exclusion in both applied and theoretical works. The causes, sizes, and consequences of both phenomena are analyzed and evaluated, which leads to the formulation of conclusions and recommendations as to how to enhance financial inclusion. This chapter surveys not only the traditional perspective of financial inclusion and exclusion but also the role of new technologies, providing innovative solutions behind the concept of digital banking inclusion. Moreover, the chapter considers new possibilities for adopting digital financial services that result from lockdowns and promotion of contactless modes of payment to reduce the risk of viruses spread through the handling of cash. With regard to the increased use of digital banking access channels, the importance of financial education in the context of ensuring cybersecurity is highlighted.

A fundamental pillar of the European Commission’s Strategy for Financing the Transition to a Sustainable Economy, harmonized sustainability reporting is functional to giving substance to a company’s sustainability endeavors, to identifying a shared classification system for sustainable activities, to tackling greenwashing, and to helping institutional investors meet the disclosure obligations they, in turn, are imposed on by the SFDR. While institutional investors remain the main users of corporate sustainability disclosures, yet sustainability reporting facilitates interaction between investors and other stakeholders, such as NGOs, as a lever by which to enhance stakeholders’ voice and overcome the limited ability of broadly diversified institutions, especially passive fund managers, to actively monitor portfolio firms and reduce systematic portfolio risk. In order for EU sustainability reporting to deliver on its promises, two factors are crucial. First, the current fragmentation of non-financial reporting standards based on different frameworks and, particularly, on diverging notions of materiality, should be overcome. Second, an adequate balance between the narrative and quantitative dimensions of sustainability reporting should be struck in order not only to make sustainability disclosures meaningful for its users, but also to allow for mutually connecting, and achieving coordination between, financial and non-financial information.

Finance that does not take sustainability seriously is finance that does not take finance seriously. The financial risks of continued unsustainabilities bring sustainability issues into the heart of any well-founded financial decision, whatever view one might have on the role of finance and business in society. In this chapter, the relationship between finance and sustainability is explored through a broadening of the approach to understanding financial risks of unsustainability. This goes beyond the established recognition of the financial risks of climate change – and the emerging recognition of financial risks of biodiversity loss. The analysis presents new risk categories, including the risk of business model change, societal risk and global catastrophic risks. The chapter also exemplifies new categories of unsustainability that should be encompassed in such a broader and systemic approach, including ‘novel entities’ and tax evasion. The chapter concludes with brief reflections on the necessity of and the legal basis for implementing a research-based approach to risks of unsustainability in law and policy reforms and in practice.

The relatively new world of ESG indicators displays many similarities with the original markets for ratings and benchmarks, but it also has some distinguishing features. This chapter explores to what extent the regulatory strategies that were developed in ‘traditional’ financial law to support confidence in ratings and benchmarks can be exported to the ‘new’ world of ESG finance, and concludes that policymakers should be cautions when transposing rules. This is especially the case with ESG ratings. In this area, credit ratings are the immediate reference for ESG rating regulation also, because of the common label of ‘rating’, which is rather misleading, and of the anchoring effect this entails. First, the assessments underlying ESG ratings are often more subjective than those supporting traditional indicators, due to their multivariate nature. Second, the risk of regulatory failures connected to the authorisation and registration labels also seems higher in the ‘new’ world of sustainability. The chapter analyses the new ESG Ratings Regulation and the Benchamkr Regulation against this backdrop, and highlights the suboptimality of some policy choices.