ABSTRACT
This chapter presents the current regulatory framework governing ESG risk and its management in the financial sector with particular focus on investment funds and insurance companies. It discusses key international initiatives, including the IOSCO recommendations, the United Nations Sustainable Development Goals, the Paris Agreement, the Principles for Responsible Investment (PRI), and the Task Force on Climate-related Financial Disclosures (TCFD), which shape ESG risk management practices, disclosure standards, and investment decision-making. Special attention is given to the European regulatory architecture, including the Corporate Sustainability Reporting Directive (CSRD), the Sustainable Finance Disclosure Regulation (SFDR), the EU Taxonomy, the Solvency II Directive, the MIFID II Directive, and ESMA, EIOPA guidelines. This chapter analyzes how ESG risks – particularly climate-related physical and transition risks – are incorporated into portfolio construction, corporate governance, risk management systems, supervisory oversight, and reporting requirements. It concludes that, despite significant implementation challenges related to data availability and regulatory complexity, ESG regulation plays a critical role in mitigating financial risks, preventing greenwashing, enhancing investor protection, and supporting long-term financial stability and sustainable value creation.
