This chapter discusses the implications of the inclusion of emission allowances within the scope of EU capital markets legislation, and its interrelations with other relevant sources of EU law, namely the Emissions Trading Schemes and REMIT. The process leading to the comprehensive treatment of emission allowances by EU capital markets legislation began with MiFID I and reached its peak with MiFID II, that includes EUAs within the definition of financial instruments. This inclusion also implies that EUAs are subject to the provisions of the Market Abuse Regulation. This phenomenon raises several issues, first and foremost those that concern coordination between different legal texts. It also raises the question as to whether capital markets legislation is indeed capable of supporting the ultimate goal that the entire regulation of EUAs pursues, that is, the reduction of emissions. Whereby there is still insufficient empirical evidence as to whether this is effectively the case, EU legislation seems to believe in an assumption that would need to be better verified overtime.

This chapter discusses the integration of sustainability risks and factors into insurance regulation. According to the European Commission, sustainability considerations should be placed at the heart of the financial system. In its Action Plan, the European Commission announced its intention to clarify the integration of sustainability in so-called fiduciary duties in sectoral legislation. The objective of the European Commission is to direct financial and capital flows to green investment and to avoid stranded assets, which could be facilitated if sustainability is more clearly integrated in such duties of financial undertakings. This chapter describes the wide range and variety of developments in this area, which reflects some of the unique characteristics of the insurance sector, and which provides opportunities to contribute to the EC’s sustainability agenda. This contribution is not limited to the provision of considerable financial contributions to the sustainable investment agenda, which is closely related to the fiduciary duties of insurers and the application of the prudent person principle, but relate as well as to other elements of the sustainability agenda and resilience of the European economy, for which the insurance and reinsurance sector is well positioned to provide a meaningful support, for instance by addressing the protection gap.

The European financial markets have been placed on the path to a sustainable and green transition. The European Commission embraced with the EU Green Deal a new growth strategy built on a sustainable economic model that aims at making the EU the first carbon neutral continent by 2050. This generational economic and industrial transition set by the EU Green Deal will require at least 1 trillion euro in public and private sustainable investments. This chapter analyzes how derivatives markets can contribute to support the green transition, enable private markets to raise capital towards sustainable goals, and help market participants to manage the market and transition risk to a sustainable economy. “Green derivatives” like ESG- linked swaps, emission allowance futures, extreme weather events derivatives, are examples of financial innovation is dealing with climate-related risk. This chapter focuses on the EU Strategy for Financing the Transition to a Sustainable Economy in the EU and offers a looks at what the Commodities Futures Trading Commission is doing in the US on climate-related risk and derivatives markets. The chapter offers some early critical considerations on the private-public synergies and opportunities that might result from the growth and expansion of sustainable derivatives markets and the possible risks that policymakers should consider in the evolution process of such markets.

Technology (especially the high energy-consuming blockchain) is not often associated with environmental goals but the elements of peer-to-peer networks, sharing economy and ‘direct’ finance in the Fintech world present coherence and continuity with the ESG world. Furthermore, the potential of Fintech in reducing costs, connecting people on a global scale, improving financial inclusion, diversification and resilience offer great opportunities also in the area of sustainable finance, advancing societal factors. Nonetheless, relevant risks and limitations must be considered, too. This chapter will first introduce the emerging area of sustainable digital finance, with particular regard to environmental objectives. Second, it will focus on ‘green Fintech’ facilitating capital raising. In particular, the chapter will analyse the main legal and technical challenges related to green financing, with special regard to green crowdfunding, green tokens offerings and other Distributed Ledger Technology (DLT)-based opportunities, also considering recent EU regulatory initiatives, also advancing some policy proposals.

Over the last few decades, executive pay has undergone several major reinterpretations, which have affected both its design and regulation.Our chapter provides an overview of the trajectory of executive pay,including the recent trend toward integration of sustainability and ESG targets in compensation packages.Our chapter also provides empirical evidence as to the prevalence of ESG-linked executive pay in public listed companies. Analysing a sample of 8,649 publicly traded firms covering 58 countries in the period 2002–2021, we show that a growing number of listed firms include drivers involving sustainable performance in their executive remuneration packages. However, we identify notable differences associated with sector and country characteristics in this regard. For example, we find that, in countries with better government features, firms are more likely to adopt ESG-linked compensation.Overall, our empirical analysis presents a mixed picture. Some of our findings could be consistent with the idea that ESG-linked compensation exacerbates the agency problem of executive pay. We cannot, however, rule out the possibility that such compensation provides a powerful incentive towards more sustainable corporate practices in the future.

The care for sustainability is one of the most urgent problems addressed by policy makers. It requires combined effort by multiple players for its efficiency. There are various levels at which different tools of multiple character are being introduced. Eventually, they turn into policies and actions by private businesses and public agencies. These different instruments can be of legislative and regulatory nature introduced on various levels: the UN conventions, communications, policies and protocols, the EU legislation, the Member States, regional and local authorities. As a result, they take a shape of instruments of various types. The range of non-regulatory tools that supplement the regulatory instruments is wide and often takes the form of financial measures. They can be divided into four groups – incentives, tradable instruments, fines and contractual compensations. All these instruments differ in terms of their character, reach and efficiency. Not necessarily being perfect, still, they contribute to the overall re-shift of approach and help transforming the current anxiety for the nature to tangible actions that protect it. The text addresses questions that are not limited to analyses of the efficiency of existing financial tools but also refer to what else could be done to enhance them and make them even more efficient.

This chapter, structured in three sections, discusses an aspect of significant importance in relation to sustainable finance under EU secondary law: the gradual shift from capital markets to banking regulation. Section 21.1 sets the scene, by briefly overviewing the initiatives of (mainly) the (European) Commission in relation to sustainable finance – which are mainly related to EU capital markets regulation, albeit with an impact on credit institutions as well – and the rules adopted by the European Parliament and Council during the period 2019–2021. The focus of the following section 21.2 is on the legislative proposals submitted by the Commission in 2021 to amend the CRD IV and the CRR in relation to sustainability and contribution to the green transition. After a general overview of this legislative ‘banking package’ and some introductory remarks on the proposed amendments (including the harmonised definitions of the ESG-related risks by amendment of the CRR), this section presents the key proposed new rules (by amendment of the CRD IV) which relate to governance issues, ESG risks, the supervisory review and evaluation process (SREP) and the enhanced competent authorities’ powers, as well as the (further) amendments proposed to the CRR. Section 21.3 contains the concluding remarks.

This chapter discusses the importance of decision-making and agency problems in bank governance with particular focus on the role of the board of directors in addressing sustainability risks that are increasingly affecting the banking business. It considers traditional agency theories that underpin corporate governance and suggests that they do not offer a full explanation of the ‘collective’ agency problems that exist in large complex organisations, such as banks and other financial institutions. Human agency theory offers an alternative theory that emphasises the importance of organisational culture in determining standards, norms and values that influence agent behaviour. As to bank boards, the chapter stresses that although their role is primary, regulatory intervention may be necessary to ensure that organisational practices are adequately managing agency problems regarding sustainability concerns. The chapter concludes with some recommendations for how bank governance and business practices could be improved to support society’s sustainability objectives.

As part of a broader policy agenda promoting more sustainable financial markets, legislative and policy initiatives within the European Union in recent years have explored the activation of micro-prudential requirements for banks and other financial intermediaries with a view to incentivise regulated institutions to change business models and investment patterns and shift funding towards projects and beneficiaries identified as sustainable. This is compatible with traditional regulatory objectives (only) to the extent that regulatory measures try to enhance the sensitivity of existing arrangements vis-à-vis new types of sustainability-related risks, the most obvious example being climate-related risks to the viability and profitability of existing loan and investment portfolios. This chapter assesses the relevant policy initiatives in the light of recent promulgations by international standard-setters, and critically discusses the potential and the functional limits of micro-prudential regulation as a driver towards more sustainable lending – as well as potential repercussions on the existing prudential frameworks.