Sustainability and financial markets

TITLE PAGE
COPYRIGHT PAGE
PREFACE BY THE SERIES’ EDITORS
INTRODUCTION
SUSTAINABILITY AND FINANCIAL MARKETS: SOME INTRODUCTORY REMARKS
Frits-Joost Beekhoven van den Boezem, Corjo Jansen & Ben Schuijling

CHAPTER 1 BANKING REGULATION AND SUSTAINABILITY
Kern Alexander & Paul Fisher
1. Introduction
2. The Banking Sector and Environmental Sustainability
3. Regulatory Objectives and Tools
3.1 Disclosure
3.2 Bank Governance
3.3 Risk Management
3.4 Regulatory Capital
4. Other International and Regional Initiatives
4.1 European Commission High Level Expert Group on Sustainable Finance
4.2 Sustainability Banking Network
4.3 Network for Greening the Financial System
5. Banking Regulation and Sustainability Risks: the way forward
6. Conclusion

CHAPTER 2 THE EUROPEAN COMMISSION’S SUSTAINABLE FINANCE ACTION PLAN
Danny Busch, Guido Ferrarini & Arthur van den Hurk
1. Introduction
2. The broader perspective
3. EU classification system (‘taxonomy’)
4. Standards and labels for green financial products
5. Fostering investments in sustainable projects
6. Incorporating sustainability when providing financial advice
7. Sustainability benchmarks
8. Better integrating sustainability in ratings and market research
9. Clarifying institutional investors’ and asset managers’ duties
10. Incorporating sustainability in prudential requirements
11. Strengthening sustainability disclosure and accounting rule-making
12. Fostering sustainable corporate governance and attenuating short-termism in capital markets
13. Concluding remarks

CHAPTER 3 LIABILITY FOR CLIMATE CHANGE LOSSES: A BLESSING OR A CURSE?
Jaap Spier
1. Introduction
2. Legal bases for liability
2.1 Introduction
2.2 States
2.3 Enterprises
3. A myriad of losses
4. The liability risk
5. The pros and cons of liability
5.1 Arguments pro liability
5.2 Arguments against liability
6. Striking a balan
7. Squaring the circle

CHAPTER 4 ADDRESSING CLIMATE (LIABILITY) RISKS IN THE FINANCIAL SECTOR
Edward Brans & Martijn Scheltema
1. Introduction
2. The Paris Agreement and the mitigation ambitions of (groups of) countries
3. Climate Change Cases
3.1 General overview of types of cases
3.2 Cases against states, (local) governments and the European Union
3.3 Cases against companies
3.4 Greenhouse gas emission performance data
4. How to incentivize sustainable finance to the extent needed?
4.1 Introduction
4.2 Fundamental shift recommended by the HLEG
4.3 The HLEG recommendations implemented through legislation or liability?
4.4 Need for global multi-stakeholder, multi-level initiatives
4.5 Effectiveness of initiatives
5. Conclusion and recommendations

CHAPTER 5 CLIMATE CHANGE AND THE FINANCIAL SECTOR: SOFT LAW IN PUBLIC INTEREST LITIGATION
Sjoerd Meijer, Freerk Vermeulen & Christine Vreede
1. Introduction
2. Soft law framework
3. Colouring open norms in Dutch civil law
4. Soft law and future public interest litigation against financial institutions
5. Conclusion

CHAPTER 6 SUSTAINABLE CAPITAL: PRUDENTIAL SUPERVISION ON CLIMATE RISKS FOR BANKS
Bart Bierman
1. Introduction
1.1 Climate and banks’ solidity
1.2 Climate risk: a definition
1.3 Set-up of this chapter
2. Prudential supervision
2.1 Introduction
2.2 Competent authorities
2.2.1 The SSM
2.2.2 The Single Rulebook
2.2.3 SSM prudential supervision
2.2.4 Supervisory tasks under the SSM
3. Capital requirements
3.1 Introduction
3.2 Pillar 1 requirements
3.2.1 Minimum capital requirement
3.2.2 Pillar 1
3.2.3 Standardised approach vs internal models
3.3 Pillar 2 requirements
3.3.1 Internal Capital Adequacy Assessment Process
3.3.2 Supervisory Review and Examination Process
3.3.3 Discretionary room competent authority
4. Prudential rules and climate risks
4.1 Introduction
4.2 Credit risk
4.3 Operational risk
4.4 Concentration risk
4.5 Sub-conclusion
5. Supervisory practice, priorities and harmonisation
5.1 Introduction
5.2 Risk priorities
5.3 Harmonised SREP methodologies
6. Conclusion

CHAPTER 7 GLOBAL WARMING: DOES THE ECB MANDATE LEGALLY AUTHORISE A “GREEN MONETARY POLICY”?
Yolaine Fischer
1. Introduction
2. A totally unprecedented context in the history of humanity
2.1 On the scientific side: “Our house is burning”
2.1.1 Climate scenarios
2.1.2 Consequences of global warming for humanity
2.2 On the legal side: the emergence of a right to a stable climate as a precondition for other fundamental rights
3. Is staying in a world under the Paris Agreement +2°C cap part of the secondary objective of the ECB mandate?
3.1 Legal effect of the secondary objective: subsidiary, but nevertheless compulsory
3.2 In practice, how can the Eurosystem comply with the secondary objective?
3.3 The prevailing importance of global warming
4. Is the primary objective of the ECB mandate (price stability) threatened by global warming?
4.1 Preliminary remark on the time horizon of the price stability objective
4.2 The impact of global warming on price stability
4.3 Should the long term impacts of global warming on price stability be taken into account by monetary policy?
5. Green monetary policy tools could be designed just by fine-tuning current monetary instruments
5.1 Legal framework of monetary policy instruments
5.2 Green targeted refinancing operations (GTROs) would rely on mechanisms close to those of some past and present monetary instruments
5.3 Other possible green instruments
5.3.1 Decarbonisation (and to the extent possible, greening) of the APP
5.3.2 Greening of collateral, including the promotion of green ABS
6. Compatibility of a green monetary policy with applicable EU requirements
6.1 Principle of conferral and democratic legitimacy
6.2 Consequences of the characterisation as monetary policy on other principles
6.3 Proportionality and procedural guarantees (examination and motivation)
6.3.1 The proportionality principle
6.3.2 The CJEU control on procedural guarantees
6.4 Open market economy with free competition favouring an efficient allocation of resources and equality of treatment
6.4.1 The requirement of an open market economy
6.4.2 The principle of equality of treatment
6.5 Independence
6.6 What is the “neutrality” of monetary policy?
7. Conclusion

CHAPTER 8 CLIMATE CHANGE AND FIT AND PROPER-TESTING IN THE DUTCH FINANCIAL SECTOR
Iris Palm-Steyerberg
1. Introduction
2. Climate-related risks
2.1 Physical risks
2.2 Transition risks
2.3 Liability risks
2.4 Reputational risks
3. The role of financial supervisors
4. Climate-related financial supervision
4.1 Controlled business operations
4.2 Ethical business operations
4.3 Transparency requirements
5. Integrating climate-related risks into fit and proper testing
5.1 Why fit and proper-testing?
5.2 Legal framework for fit and proper assessments in The Netherlands
5.3 Climate-related risks as part of fit and proper testing
6. Final remarks

CHAPTER 9 DIRECTORS’ LIABILITY AND CLIMATE RISK: NAVIGATING THE STEP CHANGE IN DISCLOSURE AND GOVERNANCE EXPECTATIONS
Sarah Barker, Ellie Mulholland & Ben Caldecott
I. Introduction
II. Climate change as a foreseeable, and often material, financial risk issue
III. Directors’ duties and climate risk
A Directors are fiduciaries and owe duties to their corporation
B Duties of trust and loyalty
C Duties of competence and attentiveness
D Enforcement of directors’ duties
IV. Director liability for misleading or inadequate disclosures relating to climate change
A The application of disclosure obligations to climate change
B Claims against directors for misleading or inadequate disclosure
V. Materiality of liability risk for directors
VI. Implications for corporate governance practice

CHAPTER 10 15 YEARS OF THE PRUDENT PERSON RULE: PENSION FUNDS, ESG FACTORS AND SUSTAINABLE INVESTING
René Maatman & Esther Huijzer
1. Introduction
2. Implementation and origin of the prudent person rule
2.1 Prudent person rule in IORP I
2.2 Origin of the prudent person rule
3. Developments since 2007
3.1 The reports of the Frijns and Goudswaard Committees
3.2 Accountability concerning application of the prudent person rule
3.3 Prudent person rule in IORP II
3.4 The European Commission’s action plan for sustainable finance and the increasing attention devoted to sustainable investment and risk policy
3.5 Governance
4. Developments in the US and the UK
4.1 Developments in the US: opposition to prudent person rule with a broader scope?
4.2 Developments in the UK: difference between financially material ESG factors and non-financially material ESG factors
5. Recap and outlook on the prudent rule in relation to ESG

CHAPTER 11 SUSTAINABILITY REPORTING
Steven Hijink & Lars in ’t Veld
1. Introduction
2. The rise of sustainability reporting – financial reporting as starting point
2.1 Corporate reporting requirements in European legislation
2.2 Mandatory application of IFRS by companies incorporated in the EU as of 2005
2.3 Broadening the scope of corporate reporting
2.4 Tensions between IFRS and sustainability goals
3. Overview of the current legal framework for sustainability reporting
3.1 Global initiatives
3.1.1 IR Framework
3.1.2 GRI Standards
3.1.3 The TCFD Recommendations
3.2 European legislation
3.3 (Additional) Dutch requirements
4. Overview of some specific requirements for (Dutch) listed companies and financial institutions
4.1 Listed companies
4.2 Financial institutions
4.2.1 Banks
4.2.2 Insurance companies
4.2.3 Pension funds, investment firms and other institutional investors
5. EU Action Plan Sustainable Finance and the EU legislative proposals of 24 May 2018
6. Sustainability reporting (requirements) in the future