Analysis: Defining sustainable financial products – Sustainability labels in the context of EU sustainable finance legislation

In recent years, there has been a significant increase in the number and volume of sustainable financial products, reflecting in investors the increasing awareness of society in general for ESG matters. Sustainability labels have been developed to ensure and protect the quality of these products and to provide in a clear and consistent manner information about their sustainable characteristics. Labels also allow financial institutions to communicate about their sustainable offering in a more objective and credible way, while at the same time reducing information asymmetry for investors who are often overwhelmed by the multitude and diversity of so-called sustainable products.

The European Union does not stay behind and is gradually imposing a framework for sustainable finance. Following the adoption of the Paris Agreement on climate change and the United Nations 2030 Agenda for Sustainable Development Goals (SDGs), the European Commission has since 2018 been developing a comprehensive policy agenda on sustainable finance, comprising the action plan on financing sustainable growth and the development of a renewed sustainable finance strategy. Sustainable finance is about re-orientating capital flows towards sustainable technologies and businesses and is an essential part of the European Green Deal. The overall objective to make the financial system more sustainable and make Europe climate-neutral by 2050 will require massive public and private investments. Sustainable financial products of all kinds are one of the means to channel private capital and involve retail investors. Legal initiatives such as the EU Sustainable Finance Disclosure Regulation and the EU Taxonomy Regulation aim to regulate these products as to avoid greenwashing and to redirect private capital to economic activities that are truly sustainable.

This analysis starts with a concise overview of the landscape and characteristics of European sustainability labels, with particular attention to the Belgian Towards Sustainability label and the future EU Ecolabel. 

In a second section, it explores how sustainable products are approached in recent and upcoming European sustainable finance legislation. Most relevant in this context are the EU Sustainable Finance Disclosure Regulation (SFDR), the EU Taxonomy Regulation and the proposed Delegated Regulating amending MiFID II. Each of these texts distinguish and categorize types of sustainable financial products in different and overlapping ways. While confusing, it is a reflection of their different objectives. In addition, neither of the texts were written with the purpose of establishing a normative framework or a labelling regime for sustainable financial products. They however provide key building blocks for the development and use of such labels. 

Finally, in the third section, it highlights the role that labels can play in the context of this new legislative framework. Because of their specific purpose sustainability labels can provide an added value to investors within and on top of the European legal framework, especially as a result of their normative aspect, user-friendliness, verification, scope and being a market standard. This is illustrated using the Belgian Towards Sustainability label.

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