The EU Sustainable Finance Framework in Light of International Standards

Abstract

This paper analyses the relationship between the EU sustainable finance legal framework (‘EU SF framework’) and the most common ESG standards. We present two different types of analysis. Firstly, we analyze the content of the international standards incorporated by reference in the EU SF framework following the classical ESG categorization, and secondly we analyze the content of such standards with the EU SF framework.

We find that the different standards incorporated in the EU SF framework partly overlap, while somehow diverging as to the details. This overlap will create frictions, given that financial service providers need to decide which of the overlapping, yet partly diverging standards they apply.

The EU environmental taxonomy presents unique features and a higher level of sophistication when compared to international ESG standards. This may result in both upsides and downsides. On the upside, the EU SF framework could function as pacemaker and facilitate impact measurement across the industry, while on the downside we see additional costs for EU firms and political resistance against the overly detailed EU approach. At the same time, the EU SF framework lacks details on the social and governance dimensions of ESG. Here, reference to international standards compensates the lack of an EU social and governance taxonomy. While this allows for greater alignment of EU and international social and governance-oriented investors, a greater degree of sophistication at the EU level could enhance the potential for impact measurement – a particularly important aspect for socially sustainable investments.

Keywords: Sustainable Finance, Taxonomy, Financial Regulation, International Standards, ESG

JEL Classification: K00, K1, K2, K10, K22, K23, K32, G23, G41, Q01, Q2