Regulating ESG investing the E.U. way

The publication of a Sustainable Finance Action Plan in March 2018 marked the European Commission’s formal launch of a major project to leverage financial markets to address sustainability challenges. The Commission had previously identified an annual funding gap of between €175 billion and €290 billion to meet its envisaged target of a 50 percent cut in greenhouse gas emissions by 2030. To plug the gap, the broad series of steps set out in the Action Plan ultimately seeks to induce behavioral change to reorient capital flows and mainstream sustainability in risk management. In this paper, we examine how the plan uses traditional regulatory tools to achieve these goals, and the challenges and opportunities in doing so. We find that changing fiduciary and suitability standards are the most coercive tactics, but enforcement and implementation will determine the degree to which these approaches cause the investment industry to consider and cater to investors’ ESG preferences. Further, new disclosure regulations will have a profound impact on the information investors have and, if they are enforced and effective, make it much easier for them to express their sustainability preferences through their investments.