Sustainable finance is increasingly not the domain of credit and development institutions. Sourcing from conventional capital markets is seen as an attractive proposition for both the supply and demand sides, as there is significant ‘dry powder’ in investment funds all over the world and sustainable finance objectives are not necessarily contradictory to objectives in relation to financial return. Pioneering developments in Europe for example show how law and regulation play a pivotal role in building capital markets for sustainable finance, and it is worthwhile examining the European initiative and other relevant global experience to consider the future of law and regulatory reform for developing capital markets for sustainable finance products.

The EU’s policy for galvanising sustainable finance is targeted at making sustainable financial products mainstream (HLEG Final Report 2018), i.e. integrated into conventional collective investment products such as UCITs retail investment schemes, alternative investment funds (hedge and private equity funds) and insurance products. This has culminated in two recent legislative reforms. First, all conventional fund managers are made subject to a new duty of sustainability risk integration, therefore overcoming the barriers to their engagement with sustainable finance for fear of contradictions with traditional interpretations of fiduciary duty. Second, product standardisation and labelling (The Taxonomy Regulation 2020) would elevate the quality of sustainable finance products so that investors can be confident of achieving sustainable objectives alongside other financial and contractual ones.

The regulatory techniques are a mixture of mandatory and enabling legislation in order to stimulate changes to market structures. They are not merely incentive-based as market-based governance has only produced niche areas of investment diversification such as in Socially Responsible Investing (SRI) or infrastructure. Hence this level of intrusion into market structures is a more intensive form of steering aiming to meet public good needs, as sustainability is often not priced accurately and particularly in the short term to make incentive-based regulation work.

This project interrogates the role of market-building regulation and their likely impact. Mass marketization regulation, like securities regulation, tends to become standardised and inflexible, based on the lowest common denominator of the investor. This tends to result in the dearth of supply over time – just like the gradual death of the IPO for new businesses. However, law and finance schools of thought generally favour the introduction of strong investor protection regulations to make markets attractive, and hence more developed over time. The general aspects of market-building reforms provide the underpinning frameworks for discussing specific sustainable finance products that are emerging and their likely future prospects, as they are subject to regulatory, contractual and market-based governance. The project intends to examine classes of emerging products such as green bonds, impact investing, actively and passively managed ‘socially responsible’ collective investment schemes and the needs of sustainable and innovative businesses globally.

The changing landscape of sustainable finance poses new regulatory challenges and calls for greater attention to relevant legal and policy issues. The conference aims at providing a forum for the participants to discuss the latest legal and policy development, examine best legal and regulatory responses, and identify challenges present in the field of sustainable finance.

The EU is the leader in sustainable finance products, beyond green bonds. Assets under management in Europe allocated to socially responsible and green investing is a marked trajectory that is set to continue. Hence European funds exert a demand side pressure on the quality of sustainable investing and European policy-makers have taken the lead to introduce legislation to set quality standards for sustainable capital markets investments and sustainable investment management practice. This project will inquire into such European leadership into asset management globally, as well as product innovation. As the US and China are also significant markets for green bonds, there is demand side appetite on the part of investors based in these jurisdictions. We would like to inquire if European leadership in market-building will become a force for emulation, convergence or divergence. Would these standards come to resonate with other markets for sustainable finance which are emerging in the US and China?

We note that market developments in green bonds have led to a form of soft law convergence, such as in the Climate Bonds Initiative adopted in the US, Europe and China. Regulatory standardisation may further propel the momentum already existing in the green capital markets towards more sustainable objectives. Ultimately, this project reflects upon the role of regulation in making private markets and connecting with global public goods, as an international phenomenon.

Approach

A 1-day symposium will be conducted to bring together scholars from a range of jurisdictions, such as the USA, the UK, the EU, Canada, China and Singapore. Participants will be asked to submit a research paper on their designated topic in advance of the symposium. The object of the symposium is to offer contributors the opportunity to share and explore their ideas in a constructively critical forum, thereby facilitating the refinement of their papers for subsequent publication.

CBFL is pleased to congratulate Assoc Professor Lin Lin and Professor Iris Chiu, UCL Faculty of Laws, on their co-edited publication of the ‘Sustainable Finance’, a special issue of the European Business Organization Law Review (Vol 23, issue 1).

More about the publication can be found here: https://link.springer.com/journal/40804/volumes-and-issues/23-1

This project has concluded.