The role of disclosure in green finance

We study the design features of disclosure regulations that seek to trigger the green transition of the global economy and ask whether such regulatory interventions are likely to bring about sufficient market discipline 
We study the design features of disclosure regulations that seek to trigger the green transition of the global economy and ask whether such regulatory interventions are likely to bring about sufficient market discipline to achieve socially optimal climate targets.
We categorize the transparency obligations stipulated in green finance regulation as either compelling the standardized disclosure of raw data, or providing quality labels that signal desirable green characteristics of investment products based on a uniform methodology. Both categories of transparency requirements can be imposed at activity, issuer, and portfolio level.
Finance theory and empirical evidence suggest that investors may prefer “green” over “dirty” assets for both financial and non-financial reasons and may thus demand higher returns from environmentally-harmful investment opportunities. However, the market discipline that this negative cost of capital effect exerts on “dirty” issuers is potentially attenuated by countervailing investor interests and does not automatically lead to socially optimal outcomes.
Mandatory disclosure obligations and their (public) enforcement can play an important role in green finance strategies. They prevent an underproduction of the standardized high-quality information that investors need in order to allocate capital according to their preferences. However, the rationale behind regulatory intervention is not equally strong for all categories and all levels of “green” disclosure obligations. Corporate governance problems and other agency conflicts in intermediated investment chains do not represent a categorical impediment for green finance strategies.
However, the many forces that may prevent markets from achieving socially optimal equilibria render disclosure-centered green finance legislation a second best to more direct forms of regulatory intervention like global carbon taxation and emissions trading schemes. Inherently transnational market-based green finance concepts can play a supporting role in sustainable transition, which is particularly important as long as first-best solutions remain politically unavailable.
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Metadaten
Author:Tobias Tröger, Sebastian Steuer
URN:urn:nbn:de:hebis:30:3-615542
DOI:http://dx.doi.org/10.2139/ssrn.3908617
Parent Title (English):ECGI Working Paper Series in Law ; N° 604/2021, SAFE working paper ; No. 320, LawFin Working Paper ; No. 24
Series (Serial Number):LawFin Working Paper (24)
SAFE working paper series (320)
Publisher:SAFE
Place of publication:Frankfurt am Main
Document Type:Working Paper
Language:English
Year of Completion:2021
Year of first Publication:2021
Publishing Institution:Universitätsbibliothek Johann Christian Senckenberg
Release Date:2021/09/08
Tag:ESG; asset pricing; benchmarks; climate change; climate risk; green finance; labels; mandatory disclosure; market discipline; sustainable finance; taxonomies
Pagenumber:63
Institutes:Rechtswissenschaft
Wirtschaftswissenschaften
House of Finance (HoF)
Center for Financial Studies (CFS)
Sustainable Architecture for Finance in Europe (SAFE)
Foundation of Law and Finance
Dewey Decimal Classification:330 Wirtschaft
JEL-Classification:D4 Market Structure and Pricing
D6 Welfare Economics
G1 General Financial Markets
G3 Corporate Finance and Governance
K2 Regulation and Business Law
G4
Sammlungen:Universitätspublikationen
Licence (German):License Logo Veröffentlichungsvertrag für Publikationen

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