Diffusing Environmental Regulation through the Financial Services Sector: Reforms in the EU and other Jurisdictions
| Date | 01 September 2003 |
| Published date | 01 September 2003 |
| DOI | 10.1177/1023263X0301000302 |
| Author | Benjamin J. Richardson |
| Subject Matter | Article |
Benjamin J.
Richardson∗
10 MJ 3 (2003) 233
Diffusing Environmental Regulation through the Financial
Services Sector: Reforms in the EU and other Jurisdictions
Summary
The financial services sector has the potential to be an important facet of future
systems of environmental governance. But, so far, only ad hoc policy initiatives
have arisen in the EU and other countries addressing the environmental roles of
banks or insurers. Because the financial services sector is where wholesale
decisions regarding future development, and thus pressures on the environment,
arise, reform of investment, banking and insurance services to promote long
term investment and better consideration of environmental impacts may be an
effective way to promote sustainable development. Reforms such as corporate
environmental reporting requirements, mandatory environmental liability
insurance, and lender liability for borrowers’ environmental harms, are some of
the ways in which an institutional framework for mobilizing financial
organizations as instruments of environmental regulation could be constructed.
§ 1. Environmental Governance through Financial Institutions
A. THE IMPORTANCE OF THE FINANCIAL SERVICES SECTOR
Preoccupied by problems of cost efficiency and policy instrument effectiveness,
scholars and policy-makers worldwide have been exploring alternative regulatory
techniques to traditional command-style regulations.1 One approach to reinvigorate
∗ Associate Professor, Osgoode Hall Law School, York University, Toronto
1. K. Bosselmann and B.J. Richardson, ‘Introduction: New Challenges for Environmental Law and
Policy’, in K. Bosselmann and B.J. Richardson (eds.), Environmental Justice and Market Mechanisms,
(Kluwer, 1998), 1-4; N. Gunningham and P. Grabosky, Smart Regulation. Designing Environmental
Policy, (Clarendon Press, 1998).
Diffusing Environmental Regulation through the Financial Services Sector
234 10 MJ 3 (2003)
environmental governance resides in the financial services sector.2 Behind the activities
of ordinary corporations are financial institutions such as banks, insurers and investors,
which supply the capital and other resources necessary for much economic activity.
Financial organizations are special types of companies or other institutions that are in
the business of providing loans, financial advice, insurance services and management of
investments to other firms and individuals. As the financial services sector is where
wholesale decisions arise regarding future development, and thus environmental
pressures, reform of investment, banking and insurance services to promote better
consideration of environmental impacts may be a highly effective means for deterring
unsustainable development. Whilst there already exist some reasons why financial
service providers wish to avoid supporting environmentally harmful activities (e.g.,
where such activities reduce the profitability of an investment or pose an insurance
risk), more often than not, barriers exist which cause environmental considerations to be
ignored or trivialized in financial decision-making.
This article considers how an approach to environmental regulation diffused through the
financial services sector could be institutionally constructed, and reflects on existing
reforms in the European Union (EU) and other Western economies. Institutional
investment, banking and insurance are each considered in turn. The approach is to
examine the environmental policy relevance of each sector, and how government
regulation could be adjusted to facilitate financial organizations’ stronger engagement
with environmental issues. The broad argument is that environmental regulation can be
advanced when governments complement regulation of ordinary companies with
regulation of their financial sponsors, and by harnessing the financial services sector as
a mechanism for environmental governance. Because the financial services sector
sponsors and profits from economic development, it arguably should share
responsibility for ensuring such development accords with environmental standards.
There are various factors, however, which can inhibit financial institutions’ focus on the
environment, principally where there are insufficient monetary incentives or inadequate
information. The aim of government regulation promoting shared environmental
governance with this sector must be to ensure that the right directions, incentives and
information are available. If this is achieved, then financial institutions should provide a
means of transmitting and amplifying primary environmental regulatory standards
throughout the economy.
In the EU, there is formal acknowledgement of the potential for ‘shared responsibility’
for environmental regulation with financial markets, as briefly referred to first in the
2. See M. Jeucken, Sustainable Finance and Banking: The Financial Sector and the Future of the Planet,
(Earthscan, 2001).
Benjamin J. Richardson
10 MJ 3 (2003) 235
European Commission’s (EC) Fifth Environment Action Programme (1992-2000).3
There are several ways in which financial institutions appear generically relevant to
environmental management: as investors, they supply the resources for environmental
initiatives; as stakeholders, such as shareholders and lenders, they exercise influence
over corporate management; and as valuers, they price risks and predict the income of
companies. Despite this potential, little work has been carried out by the EC or others
on the possible environmental roles of financial institutions.4 Nevertheless, the idea of
harnessing market organizations to facilitate policy goals is not unprecedented in public
policy design; the contractual relationship between financial institutions and their
customers has long been regulated to ensure public policy objectives and standards are
met in relation to consumer protection.5
B. NOTIONS OF ENVIRONMENTAL GOVERNANCE
Mobilizing financial service providers in the quest to create an environmental law
diaspora, whereby regulatory controls are diffused throughout the economy and society,
may be congruent with broader shifts in patterns of governance oriented towards
delegating and sharing responsibilities with the private sector. Because of the perceived
advantages of the private sector in terms of management skills, efficiency and client
knowledge, in various Western countries private organizations have been enlisted to
furnish social services such as health care and undertake local government services, to
name just a few examples.6 Such shifts can also be understood in terms of the desire of
policy-congested states, unable to satisfy competing demands, to find ways to off-load
responsibilities to civil society and the market.7 Various regulatory theorists emphasize
that regulators operate increasingly in a pluralistic setting in which effective governance
resides in flexible, collaborative mechanisms in which state functions are shared with or
devolved to private interests.8 Unlike ‘government’, which denotes organizations and
rules and implies a demarcation between public and private sectors, governance is
viewed as centering on the complex interdependencies among actors, the inter-
organizational linkages involving an array of market and non-governmental bodies. So,
3. EC, Fifth Environment Action Programme, Towards Sustainability: A European Community
Programme of Policy and Action in Relation to the Environment and Sustainable Development, (EC,
1992), 25.
4. See, e.g., Delphi International and Ecological GMBH, The Role of Financial Institutions in Achieving
Sustainable Development, (Delphi International, 1997); B.J. Richardson, Environmental Regulation
through Financial Organisations, (Kluwer, 2002); S. Labatt and R.R. White, Environmental Finance:
A Guide to Environmental Risk Assessment and Financial Products, (John Wilely & Sons, 2002).
5. R. Cranston, Principles of Banking Law, (Clarendon Press, 1997), 153.
6. J.D. Donahue, The Privatization Decision: Public Ends, Private Means, (Basic Books, 1989).
7. See J. Habermas, Legitimation Crisis, (Beacon Press, 1973); C. Offe, Contradictions of the Welfare
State, (Massachussetts Institute of Technology Press, 1987).
8. See Rein, ‘The Social Structure of Institutions: Neither Public nor Private’, in S.B. Kamerman and A.J.
Kahn (eds.), Privatization and the Welfare State, (Princeton University Press, 1989); J.Q. Wilson, The
Politics of Regulation, (Basic Books, 1980).
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