This chapter discusses the building blocks of the European Union’s strategy for climate neutrality. Carbon pricing in the EU is described, focusing on the EU ETS and on the forthcoming CBAM. Then the roles of electrification and clean molecules in the future European energy system are discussed. Finally, sustainable finance priorities, capacities, and regulatory instruments put forward by the EU are reviewed, before a brief conclusion.

We start by discussing what motivates investors to enter the sustainability field (section 11.2). We debate different reasons for their engagement, ranging from concerns for securing competitive returns to changes in the regulatory landscape and client demand. Next, we discuss how ESG factors are integrated into different asset classes. We first discuss how ESG considerations are integrated into equity investing (section 11.3). We then look at other ways to consider ESG-related information in investment decisions, focusing on impact investing and fixed income (section 11.4). Section 11.5 looks at how investors that already have invested in companies can improve these firms’ ESG performance, either via active engagement and dialogue or via voting on shareholder resolutions. Next, we discuss what different kinds of data can shape investors’ consideration of sustainability issues (section 11.6). Finally, we look at the new European legislation (Sustainable Finance Disclosure Regulation, SFDR) which requires investors to disclose the level of sustainability risks and adverse sustainability impacts associated with their investment decisions.

Since the 1997 handover to Mainland China, Hong Kong has endured pandemics, recessions, and financial crises. Hong Kong’s financial supervisory architecture performed relatively well following the speculative attacks on the Hong Kong dollar and the Hang Seng Index during the 1997–8 Asian Financial Crisis, the liquidity crunch in the 2008–9 global financial crisis, and the economic shutdown from the Covid-19 pandemic. There have been no major supervisory failures or financial instability despite several international financial assessments and reviews recommending structural reforms. This chapter argues that these recent crises call for Hong Kong’s financial supervisory architecture to reflect on the financial system, rather than wait for a market failure to incentivize a redesign. The ongoing financial system integration with Mainland China is placing more reliance on supervisory coordination and cooperation to manage financial stability. Hong Kong is critical to Mainland China’s financial market liberalization and internationalization which will be a key driver of financial market growth in the future. As an international financial centre, Hong Kong is actively involved in market and regulatory developments. Hong Kong has taken a leading role to ensure its financial markets evolve and are fertile to embrace prevailing market trends.

Stewardship codes comprise a small but important element of the institutional framework supporting a transition towards a more sustainable financial system. By encouraging investors to incorporate environmental, social and governance factors into their investment decisions, these codes can encourage longer-term financial horizons. This chapter explores both the potential of and the challenges for stewardship codes as a tool for improving the sustainability of finance through analysis of twenty-five stewardship codes. It concludes that, by supporting a progressive interpretation of the legal duties of pension fund trustees and company directors, stewardship codes can help harness the financial clout of large investors in steering business towards a more sustainable future. They have the potential to infiltrate the complex modern investment chain, extending the influence of those who think to the long term. Although each code is limited in its enforceability, together stewardship codes have an important role to play within a wider network of mutually reinforcing regulatory instruments pursuing the common goal of sustainable development and securing transparency and accountability.

The G20 has addressed climate finance from the attempt to reach an agreement in 2009 to the more technical working groups that have addressed climate change from an economic perspective. This perspective entails stressing cost effectiveness, the economic consequences of climate change and addressing climate change with economic instruments. Its consequences were most pronounced on the international level and particularly the UNFCCC and the industrialised countries’ commitment to mobilise 100 billion dollars in climate finance, as well as on institutions tasked with providing analysis to the G20 the World Bank, the OECD, the IMF. The consequences on the domestic level are less discernible. The G20 output on climate finance has been shaped by entrepreneurship from Presidencies, membership circles, interaction with the UNFCCC.

The OECD has worked with climate finance since the 1990s, addressing it from both a development and an investment perspective. As a knowledge-producing institution, the OECD has produced numerous reports and other publications on climate finance, which can be divided into two strands: A development strand within which the DAC has published statistics on the provision of development aid with climate objectives, and an investment strand producing analyses of how to redirect investment to green purposes. The former perspective led the OECD to frame climate finance as a subtype of development finance while stressing its economic aspects (cost-effectiveness, leveraging private finance). The latter, less important, perspective framed climate finance as an instrument for redirecting investments from 'brown' to 'green' and linked it to fossil fuel subsidy reform, carbon pricing and institutional investment policy. The OECD’s approach had an ideational influence on how both the G20 and the OECD member states addressed climate finance. The OECD’s output on climate finance was shaped by institutional interaction, the OECD worldview and the member states. The chapter finds that the consequences of OECD output at the international was most salient regarding the UNFCCC, and at the domestic levels most salient regarding the development strand.

In this chapter, we examine the reasons behind capital markets’ contribution to an unsustainable future, considering the distinction between market inefficiencies and market failures, and suggest five steps for policymakers and regulators to consider: (i) Establish and strengthen international and national frameworks for sustainable finance, (ii) Ensure a greater share of all public sector financial flows are sustainable, (iii) Shift private sector financial flows by adjusting pricing and other incentives, (iv) Improve market information to make the sustainability risks and rewards of financial assets clearer and (v) Educate people about the connection between their personal finances and sustainability.

Sustainable finance can be viewed as a political concept: it not only facilitates direct financial flows towards a low-carbon and inclusive economy aligned with Europe’s environmental objectives but it also serves as an indicator of how citizens’ personal savings are used. Additionally, it helps to re-legitimise the financial sector for those still outraged by the 2008 financial crisis and its ensuing consequences. To gain back the public’s trust, asset managers will have to do more than just stamp sustainable finance labels on traditional funds. They are going to have to explain their objectives and integration strategy for ESG criteria in financial management. They will also need to explain how they evaluate the financial impact of risks, such as climate change, as well as how they select ESG performance indicators alongside standard financial performance. The European Commission launched its new Green Deal to transform Europe’s economy and shape it for a sustainable future and has included a sustainable finance action plan into this project for the implementation of a Just Transition. The main challenge now is to share this objective with citizens in clear words.

For the financial sector to play its necessary, supportive role in a more sustainable economy, with less resource-intensive and more resilient growth, enduring change is needed in the sector’s system of values, beliefs and behaviours. This represents an opportunity for all players in the financial industry to reinstill a positive purpose in their role in society at large. The rules of engagement of any system are based on implicit or explicit governance principles and driven by leadership actions. This chapter explores three aspects of governance principles. First, the requirements of education, training and qualifications in respect of sustainability issues for leaders and finance professionals, to enable them to take into account the relevant and material environmental, social and governance risks and opportunities affecting their business. Second, the changes needed in the governance framework of financial institutions, with a particular focus on the concept of stewardship. Third, the necessary modifications to director duties in general, so that the intended stewardship action can be effective in rendering the real economy more sustainable over time.

Mobilising capital for a sustainable economy requires action on two fronts. Current capital allocation must be shifted from an unsustainable pathway to a sustainable one and the investment gap must be filled to ensure that sustainable economy objectives are achieved; this includes fulfilment of the Paris Agreement on Climate Change and the UN Sustainable Development Goals. This chapter focuses on the latter issue: filling the investment gap. Primarily, it focuses on the example of tackling the climate change challenge, although these ideas can be applied to the wider environmental and social agendas too. It discusses how to: understand and articulate investment needs; adapt market arrangements using policy to encourage investment; improve the efficacy with which public finance crowds in private finance; and ensure impact through positive real economy outcomes. Throughout the chapter, real-world examples of the 'policy prescriptions' are offered to turn theory into practice.

The EU has spearheaded innovative legislation in 2019 to promote the financing of economic activities to tackle climate change. But the social aspects of tackling climate and environmental problems have received inadequate attention in the legislation. This has resulted in inconsistent legal definitions and unelaborated processes to ensure all economic and climate tackling activities are socially sustainable. In many cases climate changing activities have resulted from, or been combined with, breaching social and human rights. Providing opportunities to citizens and communities to (financially) redress environmental problems is important for a just transition. An integrated approach whereby ESG risks and long term impacts are integrated in all banking and investment decision-making should be urgently taken up by the Commission. Building on existing international standards, voluntary codes and expertise in the EU’s social sector would help to meet the existing challenges. Such EU policy should also be integrated in the EU’s international trade and investment treaties that create the competition from financial players outside the EU which might not integrate an ESG approach.

Sustainable finance has a key role to play in achieving a just transition - in other words accelerating the shift to a net zero and resilient economy in ways that are fair and inclusive. This chapter sets out why a just transition is essential for the scaling up climate action and achieving wider progress on sustainable development. There is also a compelling rationale for action within the financial system to support a just transition. Institutional investors have been leading the way and over 150 institutions with $10 trillion in assets have now committed to take action. Their aim is to avoid systemic risk and deliver on their fiduciary duties. Policy action is aso needed which mobilises both public and private finance, particularly for place-based action. The chapter closes with a set of priority actions for the European Union.

The role of financial institutions in sustainable transitions has been conceptualised for a number of years. There is a growing recognition that traditional approaches are insufficient in the face of new levels of scale, likelihood and interconnectedness of environmental sources of risk. This chapter conducts a review of existing approaches to incorporating environmental sources of risk into mainstream financial risk frameworks. The review generated 14 illustrative case studies from submissions of G20 countries, financial institutions and private-sector stakeholders. The chapter makes several contributions to the research on sustainability transitions. First, it proposes a simple analytical framework for understanding environmental sources of financial risks. That helps financial actors understand and engage with environmental sources of risk. Second, it underlines the role of financial firms in sustainability transitions. Environmental risks must be priced correctly, so that sufficient capital is allocated. The progress of financial firms in incorporating environmental risk management into mainstream financial risk frameworks is summarised as are the challenges and solutions.

The chapter will provide an original and innovative insight into sustainable finance by analysing social movements’ interaction with complex finance dynamics (CFDs) through elements of trustworthiness. In doing so, the paper will draw on data from an empirical qualitative study that traced the involvement of social movements in shaping three major legal CFDs, namely project finance, bond finance and pension finance on the sustainable finance market between 2015 and 2018. It will argue that social movements, who are, by tradition, in conflict with dominant paradigms, pose a perceptible competitive challenge to major stakeholders who shape the finance dynamics. Whilst the utilisation of the trustworthiness analytical framework proves useful in uncovering the conflict, it serves the main purpose of demonstrating the analytic competition between social movements and the major stakeholders. The author argues that social movements should take a more responsible stance towards sustainable finance and, logically, adopt a form of responsible principles that will govern their relationship with the major stakeholders shaping the CFDs. Further, the author drafts principles in this chapter and argues that, if adopted by social movements, these will improve their competitive advantage on the fast-paced sustainable finance market.