Sustainable finance
Trends, issues and perspectives amid the evolution of the EU regulatory framework

N. Linciano, E. Cafiero, A. Ciavarella, G. Di Stefano, E. Levantini, G. Mollo, S. Nocella, R. Santamaria, M. Taverna

Abstract
This paper offers a systematic review of the evolution of sustainable finance and the related law & economics debate, with the purpose of providing a mind map encompassing the role of financial players, market dynamics and the contribution of a regulation fostering the consideration of ESG (Environmental, Social and Governance) factors in financial actors' decision-making. Starting from the definition of sustainable development and sustainable finance, it describes the evolution of corporate social responsibility and of sustainable investing by institutional and retail investors as well as the initiatives by third-party information providers and the ability of financial markets to price sustainable factors. The review allows to ascertain among the most relevant frictions to the development of sustainable finance the lack of a common language for the identification of sustainable financial activities, products and services, together with the inadequacy and non-comparability of the information made available by companies and information intermediaries. Such market failure implies the need for regulatory intervention, which at present finds its fullest expression at the European Union level. The European Commission 2018 Action Plan and its implementing measures focus on increasing the reliability and comparability of information on sustainability of economic activities and financial products, so as to increasingly channel financial resources to sustainable activities. The European Commission also intervened on the rules of conduct for intermediaries in the provision of investment services as well as on certain corporate governance features. Additional initiatives are underway, such as those relating to sustainability reporting. Within this framework, securities markets authorities face some challenges concerning: the risk of green/socialwashing; the risk of misalignment between market valuations of sustainable investments and their fundamentals; abrupt price corrections associated with the acceleration of the green transition prompted by the ongoing evolution of the regulatory framework; the financial innovation that issuers may implement when designing ESG products. To best address the transition to the sustainable finance paradigm, it is increasingly important for financial supervisors to take a proactive and evidence-based approach. It is also crucial to promote the application of technology to sustainability, to enhance both the quality and comparability of information and the access to capital markets by sustainability-oriented investors and companies as well as the efficiency of compliance by market participants and supervision by securities markets authorities.  
 

Authors
CONSOB team was led by Nadia Linciano, Head of Economic Research Unit (n.linciano@consob.it).
The authors thank Commissioner Professor Anna Genovese, Chair of the Steering Committee CONSOB on sustainability, for useful comments and Antonio Mazzilli for his comments on a previous version of the paper. The opinions expressed in this document are the authors' personal views and are in no way binding on CONSOB. In citing this paper, it is therefore not correct to attribute the arguments expressed therein to CONSOB.