Why is sustainable finance so disconnected from capital markets?

The European Union has not done enough to integrate its green goals with the Savings and Investments Union and its overall approach to finance. This is a missed opportunity. Europe needs better capital markets to fund its significant innovation and investment needs while navigating the green transition. As long as sustainability measures – including the disclosure requirements that form the policy backbone in this area – are out of sync with mainstream market activity, green finance rules won’t generate enough of the actual finance necessary to fund the green transition.

Right now, EU disclosure rules do not line up with the more widely used International Sustainability Standards Board (ISSB) practices, meaning some companies need to do multiple sets of reports to fulfil all their investor obligations. The biggest difference is that the EU uses an approach called ‘double materiality’ that also asks for data on overall climate impact. 

The EU’s recent ‘omnibus’ package on sustainable finance aimed to simplify the disclosure rulebook, but it did not reconcile European rules with the global standards. Nor did it substantially reduce overall complexity – instead it exempted many small businesses while leaving a tangled set of rules and deadlines for bigger companies to manage. 

To improve its sustainable finance approach, the EU should prioritise solving technical challenges and keeping its policies finance-focused; look beyond green bonds to equities, venture capital and other asset classes; use guarantees and subsidies sparingly; simplify data collection; and pare back ‘double materiality’ so that it is more compatible with the global market standards.

Europe should resist the urge to use sustainability disclosures to regulate non-financial outcomes. It’s all the same market, and stakeholders will have to work together to make sure climate-friendly projects can get the funding they need.

The Why Axis is a weekly newsletter distributed by Bruegel, bringing you the latest research on European economic policy. 

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