Regulating Sustainable Finance and the Green Transition in the EU

Sustainable finance developed according to market-based logic first, driven by risk and return considerations. However, rising social costs of sustainability problems and international sustainability commitments, particularly with respect to climate change, coupled with market failures of mainstream finance, point to a more regulated approach in the future. The European Union (EU) is at the forefront of these regulatory efforts. In the past few years, the EU developed a comprehensive sustainable finance framework in the context of a broader European Green Deal strategy. Its objective is to redirect private capital flows to finance the EU green transition using three building blocks: a science-based EU classification system (taxonomy) of sustainable economic activities, sustainability disclosure rules for non-financial and financial companies, and sustainability tools for designing financial products. Implementation of the EU sustainable finance framework will have substantial implications for the financial industry, policymakers, and research and may help shape international sustainability standards.