Sustainable finance regulation – authoritative governance or market-based governance for fund management?

An innovative form of governance for sustainable investment products has been introduced in the E.U. in order to address the fears of investment mis-selling, as well as to actively steer sustainable investment allocations towards defined causes of sustainability, in particular, environmental sustainability. The E.U.’s sustainable regulation framework is discussed in this paper as an “authoritative” form of governance without being authoritarian. Investment allocation is a matter of market choice but regulation intends to achieve clarity in relation to sustainable costs and achievements in order to influence investor choice. The U.S. and U.K. are also developing reforms in sustainable finance regulation, but are more narrowly focused on anti mis-selling and investor protection. This paper discusses their approaches as fundamentally market-based, in contrast to the E.U.’s, as the industry and investors remain in control of defining sustainability goals, if any, in investment. The paper critically discusses the prospects of market mobilization under these different approaches and what may entail from their regulatory competition.