Building a Single Market for Sustainable Finance in the EU- Idealism, Policy and Mixed Messages

Abstract

Since the European Commission adopted an action plan for promoting sustainable finance in 2018, legislative reform has been introduced for enhanced market building in sustainable finance products as well as to harmonize the regulative standards for them. Regulation is intended to mobilize the mainstream investment fund sector to develop and provide choice in their offers of sustainable financial products, hence it can be regarded as enabling in nature. It is also in the nature of harmonized European regulation to provide for sufficiently high-quality regulative and protective standards so that market development is carried out in a manner that inspires market confidence. This is consistent with the ordoliberal underpinnings of single market regulatory measures in the financial sector. However, regulative standards tend towards high-quality in order to underpin market credibility, but they may sometimes be counterproductive if ‘idealism’ becomes too demanding.

This article examines the Regulation on sustainability disclosures required of the financial services sector and the Taxonomy Regulation in their roles to make sustainable finance products widely marketised by the mainstream investment funds sector. It examines the finely balanced nature of the EU’s governance of sustainable finance as its enabling elements and regulative ones interact. We argue that the net result is mixed messages to the market which may not lead to significant development in market structures and product choice. We further interrogate a lacuna in law that investment advice is not adequately regulated in relation to sustainable financial product offerings.

Keywords: sustainable finance, taxonomy, actively-managed, passively-managed, indices