Combatting Climate Change in Financial Law: The EU‘s Approach towards ‘Sustainable Finance‘

Over the past few years, the EU has introduced an array of regulatory measures greening the EU‘s financial sector. By increasing transparency, nudging financial actors in the green direction and improving banks‘ ESG risk management, this “sustainable turn“ is to channel private capital to sustainable investments, thus accelerating the EU‘s transition to climate neutrality. However, the neoclassical economic approach underpinning the regulatory design holds little predictive power given the complex political economy of transition financing. Adopting a legal institutionalist approach, the paper addresses this shortcoming by exploring the hybridity inherent in the EU‘s sustainable finance turn and discussing how such regulation alters an array of claim relationships in financial markets. In so doing, it seeks to assess whether the EU‘s efforts can be successful in anticipating a “net zero“ future.

The response to the Covid pandemic has been heralded as a Hamiltonian moment for the European Union‘s constitutional architecture. By way of innovative financing, the Recovery and Resilience Facility makes available unprecedented sums to achieve climate neutrality in 2050. To this end, Member States submit recovery and resilience plans to the Commission, which should address challenges identified in the European Semester and the Country-Specific Recommendations. Subsequently, the Council approves this plan with the possibility to seize the European Council in an emergency break procedure if there are serious deviations from the plan. This contribution will examine the institutional setup of the Recovery and Resilience Facility and how it fared after one year in action. It will uncover how newly devised decision-making procedures build upon the existing constitutional framework of economic governance and help propel the European project towards green transition.

The European Union made a clear commitment towards fighting climate change and established a binding target of climate neutrality by 2050. Towards this goal, the Union is mainstreaming climate change in all Union policies and the Taxonomy Regulation adopted in 2020 is a good example of this phenomenon and a perfect candidate to study the boundaries of climate mainstreaming. It notably raises the question to which extent the EU legislator and the Commission have the possibility to shape the definition of what is sustainable when it comes to climate. Are limits to be find in the Treaty or the jurisdiction of the Court? This is particularly salient with the inclusion of nuclear and gas in the Taxonomy in a context where the Member States have contradictory views and interests on what should be sustainable and threaten to contest the decision in front of the Court. In the latter event, would it be to the judges to define the contour of sustainability, or shall they refrainfrom doing this?

The European Commission is dedicated to transform the EU economy into a sustainable economy, while also dealing with the inevitable consequences of climate change. Banks will be at the heart of it, financing the transition to a more sustainable economy. In the process, banks are being exposed to physical and transition risks as a consequence of climate change. For several years the ECB has identified banks‘ exposure to these risks as one of the main vulnerabilities in the European banking sector. This presentation will go into what these risks mean, how the ECB supervises them and what the legal mandate is to do so. In addition, the regulatory and supervisory framework is rapidly evolving. This presentation will explain what is to come.