Green finance or financing green? Bridging the EU’s sustainable-finance and capital-market architectures

Executive summary

The European Union has not done a good job of integrating its green goals with its overall approach to finance. Sustainability disclosure and capital markets policy are too separate, even though they both operate in the same global environment. Projects that help the climate transition need money, meaning they need optimal market conditions as well as environmental credentials. Connecting market and green-finance policies would help.

At their best, sustainable finance disclosures are used by companies for self-assessment, peer comparison and aligning business models with the needs of the green transition. This, in turn, can lead to innovation, jobs and growth, and more care for the natural environment. At their worst, these disclosures become compliance burdens, demanding tremendous resources to produce data that is little used. EU efforts to simplify sustainable finance rules have not reduced complexity or reconciled the EU’s departures from global sustainable finance standards.

To make its sustainable finance policy more fit for purpose, the EU should prioritise the solving of technical challenges; look beyond green bonds to equities, venture capital and other asset classes; use guarantees and subsidies sparingly to incentivise investment and market tools such as securitisation; reduce the role of the EU taxonomy and simplify data collection; and pare back the role of so-called double materiality so that EU rules can be more compatible with global standards, such as those developed by the International Sustainability Standards Board.

1 Introduction

The European Union’s approach to sustainable finance is a study in contrasts. Historically dependent on bank financing, the EU has been trying to consolidate and improve its capital markets. It also prioritises the green transition and the mobilisation of more money for related investments. Disclosure requirements are part of the attempt to bridge the gap, in the hope that offering more information will inspire more and better take-up. 

When the system works, companies and projects are clear about what they are doing and how it fits into the broader effort to reduce carbon emissions, while investors can choose projects that align with their strategies. Governments can see where the private sector is investing and where complementary efforts might be needed to produce more public goods. The risk, however, is that companies spend time and money producing reports that no one uses, and governments mistake disclosure for financial incentive. Policymakers cannot compel investment or capital-market development solely by forcing more information to become available. Risks are magnified by the EU’s longstanding decision to work independently of and more ambitiously than global standard-setters such as the International Sustainability Standards Board (ISSB)¹. 

If sustainable finance disclosures become an attempt at back-door regulation, they will become a compliance exercise with little connection to real financial channels. If there is little overlap between the regulators tracking these standards and investor behaviour, companies will create statistics and not economic activity. This may help track macro trends about the climate and the economy, but is unlikely to boost markets. There is also a risk of greenwashing, if companies focus on maximising labelling.

On the flip side, very detailed disclosures may be of great interest to individual investors doing due diligence on individual companies, but that level of detail may not scale up into comparable sets of information, given the many particulars involved. When disclosure does change company behaviour to reduce industrial emissions, it may do so at a cost of lower profitability (Chen et al, 2018). Some investors may actively avoid such correlations. 

Supporters of a strong disclosure regime would say that investors allocate capital on a forward-looking basis, and making more information available adds another incentive. Sceptics would counter that disclosure should not be relied on to set a price signal for things the market cannot price.

In a 2025 cost-benefit analysis, the Commission-backed European Financial Reporting Advisory Group (EFRAG) was readily able to identify around €4 billion in savings from a proposal to simplify the European Sustainability Reporting Standards (ESRS; see section 3.1), while saying benefits to data users could only be assessed in qualitative terms (EFRAG, 2025). Similarly, a 2023 assessment of the 2019 Sustainable Finance Disclosure Regulation (SFDR, Regulation (EU) 2019/2088) found that most commenters both supported the measure’s goals and did not find the regulation effective. Notably, 84 percent of respondents (249 out of 296) did not believe required disclosures were “significantly useful” to investors, and 83 percent (245 out of 296) said disclosures were being used as a marketing tool rather than a disclosure framework (European Commission, 2024).

There are some fundamental contradictions in the EU approach. Capital markets development is sector agnostic. But the sustainable finance framework is rooted in the 2020 European Green Deal plan for climate neutrality by 2050, meaning preferred policy outcomes are baked into the disclosure process on top of information that investors want. 

Europe’s challenge now is to link sustainable finance policy with capital markets and make sure the policy architecture combines both strands. So far, there has been little interaction between the green finance market and broader capital markets, or Europe’s related policy approaches. Yet as European Central Bank President Christine Lagarde said in 2021, the green transition offers an opportunity to build a truly European capital market, given the size and scope of investment needed (Lagarde, 2021) This paper offers a framework for thinking about these channels in a more joined-up context and provides recommendations on making the system more market-driven. 

2 The evolution of EU capital markets and sustainable finance rules

2.1 Sustainable finance disclosures in theory and practice

In general, corporate social responsibility (CSR) disclosures are associated with better financial reporting and more ethical corporate performance (Rezaee and Tuo, 2017). But high emitters of greenhouse gasses in Europe have been more likely to engage in ‘earnings management’ by taking advantage of carbon offsets and other emissions management techniques, leading to lower quality financial reporting (Mamatzakis and Tsouvanas, 2025).

Meanwhile the global outlook for sustainable finance has shifted dramatically. While some sectors have found a consistent niche and continue to see issuance and take-up, changing political attitudes have tended to marginalise the sector. The United States under President Donald Trump has withdrawn from various international climate initiatives and discouraged investment in so-called ESG (environmental, social and governance) oriented funds². This has reinforced a trend of European asset managers remaining active in sustainable investing, while their US counterparts increasingly vote against social and environmental resolutions (Schoenmaker, 2026).

Policymakers and market participants are split on how to calculate finance needs, funding gaps and market potential. Euroclear (Euroclear and Strategy&, 2021) said the world could target up to $25 trillion in possible sustainable finance investment, but needs to dismantle current barriers. These include insufficient market infrastructure, unclear processes, high costs of managing disclosures in multiple jurisdictions and just being located in regions that lack capital-market depth. Euroclear’s recommendations – reducing barriers, improving information flows and expanding market participants and asset classes – require development of EU capital markets as much as sustainable finance per se. This estimate is aimed at the potential of the finance universe, in contrast to government and climate policy researchers’ assessments of funding needs to combat global warming.

The EU has stuck to its policy commitment to green investment. But regulatory uncertainty and ongoing complexity have not done the sector any favours. Merler (2025) recommended that the EU combine and consolidate its many sustainable finance regulations, broaden them to include a wider swath of investment classes, consider the classification of defence spending³ and look for ways to bring transition finance into the fold – but this has not happened (see section 3). 

Sustainable finance was one of eight sectors subject to European Commission ‘omnibus’, or simplification, proposals in 2025 (see section 3). So far, these proposals have been criticised for sidestepping impact assessments and skimping on accountability procedures (Bucher and Golberg, 2025), and the sustainable finance legislation in particular was singled out for its poor process (Marcus and Thomadakis, 2025).

2.2 The EU’s shift from single market to single financial market

The past decade of European Commission financial policymaking offers a window into how the EU has integrated finance into its broader economic policy. In general, banking and financial services have been integrated over time, but sustainable finance remains relatively isolated from internal workstreams and also international advances. 

The European Commission’s Directorate General for Financial Stability, Financial Services and Capital Markets Union (DG FISMA) is the centre of finance policymaking at the EU level. It was created when former Commission president Jean-Claude Juncker took office in 2014, as the EU wrestled with the legacy of the euro crisis and first-hand experience of the ‘doom loop’ that can form when countries and financial institutions get into trouble⁴. 

Previously, financial stability had fallen under the domain of the Directorate General for Economic and Financial Affairs (DG ECFIN), which still keeps an eye on the financial sector as part of its country-specific reporting responsibilities. Banking and financial services, however, had fallen under the auspices of the Directorate General for Internal Market and Services (then DG MARKT), which in its current form has little to do with banking and finance⁵.

These institutional shifts underscore that integrated financial markets are a necessary infrastructure, rather than just a business sector. Linked-up financial channels have become essential for the EU to maintain its way of life and hold its own against the US and China in the complicated and competitive global economy.

2.3 The EU and the rest of the world move at separate speeds

The EU’s banking and capital markets have not integrated equally. In the same year DG FISMA took on its current shape, the ECB’s Single Supervisory Mechanism became the top authority for the euro area’s biggest banks, a major step toward achieving so-called banking union (Véron, 2024). In 2015, Juncker’s commission proposed a ‘capital markets union’ (CMU) but unlike banking union, this has so far produced limited results in its quest for more common supervision, easier cross-border insolvency, increased funding for start-ups and a better retail investing landscape (Véron, 2025). 

A decade on, capital markets deadlock persists, with capital market fragmentation considered a top barrier to economic growth and competitiveness (Draghi, 2024; Letta, 2024). Draghi (2024) highlighted markets as essential for the green and digital transitions. Leaders regularly reaffirm their “steadfast commitment” to moving forward on capital markets⁶. At the suggestion of Letta (2024), the European Commission has rebranded the effort the ‘savings and investments union’ (SIU). 

The name-change highlights who will benefit if Europe ever makes progress on reducing the fragmentation. Savers will benefit from better vehicles with which to prepare for retirement, while companies will get access to a bigger and broader pool of financing options.

However, the change also shows the disconnects between Europe’s goals and policy architecture. In principle, SIU is an umbrella that includes both banking union and capital markets union. In the organisational chart, SIU is a ‘horizontal policy’ unit while banking, financial stability and financial markets each get their own hierarchy⁷. Sustainable finance is another horizontal policy unit. They are slotted in as market enablers, not market drivers, and thus somewhat apart from the core policy workstreams and each other. 

2.4 The EU rulebook has been leapfrogged by global standard setters

The European Commission’s sustainable finance regulatory push dates back at least a decade, kicking off with the 2016 green bond study (European Commission, 2016)⁸. Next came a 2018 action plan and legislative package, followed by the 2020 European Green Deal and another big sustainable finance package in 2021. This provided the foundation for the EU taxonomy, which took shape as an official rulebook in the EU Taxonomy Regulation (Regulation (EU) 2020/852), for defining green investments, and the EU’s green bond standards that require 85 percent taxonomy alignment. 

The hope was that by defining sustainable investment and requiring firms to provide a lot of information about how they measure up against the definition, money would rush to the firms best placed to advance the green transition. Europe would become a leader in green finance standard-setting and the rest of the world would follow suit, in line with the ‘Brussels effect’ theories of global regulation (Bradford, 2019).

However, while the market for green investment products has grown and matured, investors have not rallied around Europe’s maximalist approach. Instead, issuance mostly follows the International Capital Markets Association’s (ICMA) green bond standard, first developed in 2014, and disclosure rules set out by the International Sustainability Standards Board (ISSB), a 2021 offshoot of the IFRS (International Financial Reporting Standards) Foundation⁹, which bases its work on market-led and investor-focused reporting initiatives. The EU itself used the ICMA standards for its green bond programme under the NextGenerationEU (NGEU) post-pandemic recovery initiative (see section 3.2). The NGEU green bond programme was launched in 2021 with the intention of making the EU the world’s largest green bond issuer¹⁰.

The biggest difference between ISSB standards and the EU process is expressed in terms of ‘materiality’, or what factors go into deciding what to disclose. The ISSB uses a ‘single materiality’ framework that focuses on climate information that affects a company’s financial outlook. In contrast, the EU approach calls for ‘double materiality’, which forces companies to assess how their activities affect the climate overall, not just in terms of their own bottom line. This is at the heart of the policy debate. Supporters of double materiality want to show that the planet’s fortunes are directly linked to the financial outcomes of specific companies; Merler (2025) recommended increasing its relevance by requiring all European providers of green ratings to include an assessment of this measure, even those who use their own metrics. Critics, however, view this overall impact as an externality without a clear price signal or uncontested benefit to shareholders¹¹.

The EU approach is not the current standard worldwide. More than 50 green taxonomies are in use or development globally¹², and EU taxonomy-aligned green bond issuance made up less than 10 percent of the market as of 2025¹³. There is as yet no passporting approach between the ISSB standards and the EU protocols, meaning companies that wish to comply with both sets of rules must consult both rulebooks and make careful choices as they put their disclosures together.

When considering whether the attempted ‘Brussels effect’ was realistic for sustainable finance disclosures, it is worth comparing to other national interactions with international financial standards. EU rules generally require companies to use the International Accounting Standards Board (IASB, part of the IFRS Foundation), rather than developing its own track. Meanwhile, despite being a champion of multilateral standards generally, and in banking specifically after the Global Financial Crisis, the EU in 2014 was judged, ‘materially non-compliant’ with one of the main pillars of the Basel capital standards for banks¹⁴ – this has not, at time of writing, been resolved. It is also worth noting that the US, represented by the Securities and Exchange Commission, dropped its ISSB-related rules in 2025¹⁵, but US financial firms continue to use the ISSB standards. This shows that market standards can be more consistent than government signals and may deserve a bigger role in policy coordination.

2.5 Competing policy goals create a sense of ambivalence

The inconsistent policy language that characterises the EU’s capital-markets and sustainable-finance efforts suggests that Europe remains ambivalent about its priorities. Merler (2025) noted that the green finance rules assume that disclosures can alter the course of behaviour, rather than facilitating market-oriented decisions. The European Commission reports taxonomy compliance for its own bonds on a voluntary basis and has not announced plans to issue using the taxonomy-aligned European Green Bond Standard¹⁶.

The complexity of the rules means that they may discourage as much as they inspire. If compliance is too much of a burden, it may deter rather than incentivise sustainable finance capital allocation (Nerlich et al, 2025). This runs counter to the idea that better information will inspire investment absent a clear financial incentive.

Sustainable finance disclosures are not among the six pillars of the EU Clean Industrial Deal¹⁷, a plan to boost industrial competitiveness alongside decarbonisation led by the Commission’s climate and energy teams. Its financing provisions focus on the EU budget and on state-aid rules. European spending, not European financial regulation, has now taken centre stage in the green agenda. 

DG FISMA’s current approach to the disclosure rules contributes to the sense that sustainable finance has been sidelined from the main markets agenda. Asked how the capital markets union connects to the green finance framework, EU Commissioner for Financial Stability, Financial Services and the Capital Markets Union Maria Luis Albuquerque has said she is “agnostic” about green finance and considers it part of the Clean Industrial Deal, rather than one of her mainstays. “Sustainable finance, in order to make its way to capital markets, has to be a good business case. We will not force private money into anything. For money to flow into sustainable finance, it has to offer good returns, competing with other alternative investments. That is how it makes its way”¹⁸.

It is useful to review the way key officials address the discrepancies between the EU’s ambitions and the investor-driven protocols. When asked in 2025 whether the EU standards could become more aligned with the ISSB rules, perhaps even permitting certain kinds of disclosure passporting, ISSB Vice-Chair Sue Lloyd was not optimistic. In her view, the EU rules ask for information that “investors would not require” and the difference in focus cannot be easily reconciled, with “things built into ESRS that are based on the [European] Green Deal that are sort of policy focused, whereas the ISSB standards are very intentionally policy neutral”¹⁹.

3 The EU simplification push and implications for green bonds

3.1 The ‘Omnibus’ test case

The EU’s sustainable finance framework is a confusing sprawl of regulation, especially given its stated aims of providing straightforward information to market participants. Among the most important components are the Corporate Sustainability Due Diligence Directive (CSDDD; Directive (EU) 2024/1760), the Corporate Sustainability Reporting Directive (CSRD; Directive (EU) 2022/2464) and the EU taxonomy (section 2.4). Many aspects of these rules, plus related parts of auditing and accounting regulations, were revised in a simplification package proposed in February 2025 (known as ‘Omnibus I’) and enacted a year later, even as technical revisions proceed at different speeds²⁰. The EU is also revising the Sustainable Finance Disclosure Regulation and related standards (SFDR; see section 1)²¹, to align better with the setup. 

By putting sustainable finance at the top of its simplification wish list, the European Commission decided to try to streamline its rulebook before the new standards even took effect. This was contentious within the Commission as well as with outside stakeholders²², On balance, however, there was a broad recognition that the EU sustainable finance framework had become too complex and might need recalibration²³.

Unfortunately, the consensus so far about the omnibus is that it did not simplify the EU’s rules; rather it has reduced the number of firms within their scope (Todeschini, 2025). CSRD reporting thresholds were raised to companies with 1,000 employees or €450 million in revenues, compared to 250 employees and €50 million previously – a 90 percent reduction in firms covered. EFRAG, the Commission-backed advisory group that sets reporting standards, proposed reducing the number of data points by about 70 percent²⁴.

CSDDD thresholds were raised even higher: the requirements will only apply to companies with 5,000‑plus employees and €1.5 billion in net annual revenues, up from 1,000 employees previously. These rules no longer include mandatory transition plans and call for much less supply-chain detail. CSDDD will now not come into force until 2028, a year later than the previous deadline, which raises the possibility that the rules could be changed again after further review.

At time of writing, work is ongoing on SFDR and revisions to the European Sustainability Reporting Standards (ESRS), and on what penalties will apply for noncompliance.

Critics have attacked the simplification push from all directions: for failing to simplify enough, exempting too many companies from reporting at all, penalising early movers who were working with the old rules and skipping impact assessments and other procedures²⁵. Marcus and Thomadakis (2025) wrote that “bad process leads to bad outcomes. The process failures associated with the formulation of the legislative proposal for the Omnibus Directive are legion.” 

3.2 Green bonds as a testing ground 

Green bonds have so far been the focus of the EU’s sustainability standards (Merler, 2025) and will offer the clearest case study of whether the approach can work or not. The EU’s own green bond standard is off to a slow start after its December 2024 debut. Responsible Investor found 13 transactions in the first nine months of its use, largely in finance and energy²⁶:

• Utilities: Terna, A2A, Snam, Iberdrola, Energias de Portugal, Norsk Hydro, Finnish nuclear power co;
• Finance: EIB, ABN Amro;
• Other: Ile de France Mobilité, Covivio, Community of Madrid, Latvian water utility.

This raises questions about whether the standard is scalable, and whether it is helping the green transition or just helping energy companies reframe their activities so they look greener. The 2026 Nordea bond issue, which raised funds for mortgages on energy-efficient housing²⁷, suggests the use of the standards could broaden out. But one significant transaction is not a whole market. 

In contrast, the International Capital Markets Association’s (ICMA) Green Bond Standards (section 2.4) now cover about $3 trillion in market capitalisation, with annual issuance of $700 billion per year (Demski et al, 2025). The market is also venturing into products such as sustainability-linked bonds, returns from which are tied to climate metrics, and transition bonds, which by definition cannot be aligned with the EU taxonomy to the required degree.

The dependence of the EU green bond standard on the EU taxonomy is an inherent liability: because the taxonomy does not describe the entirety of the real economy, market participants trading specifically taxonomy-aligned investments are not going to be very diversified (Merler, 2025). Only 16 percent of EU companies’ eligible capital expenditure is taxonomy-aligned, with an especially large gap for transitioning sectors including transport, construction, infrastructure, real estate and chemicals²⁸. This could create financial risks that would seem counter to the risk-reduction intent of the protocols.

The EU itself has used the ICMA principles rather than the EU green bond standards on its way to becoming one of the world’s largest green bond issuers. Through the NGEU pandemic recovery project, the EU has issued more than €80 billion in green bonds as of April 2026²⁹. Reliance on the ICMA standard was originally explained as a timing constraint: the need to start issuing before the EU taxonomy was ready. Now, with no announced transition to the EU standard, it seems more like a case of global inertia.

4 Conclusions and recommendations

4.1 Seeking a joined-up model of finance

The EU’s sustainable finance framework is too complicated, too internally conflicted and too disconnected from international standards to meet its policy aims. Its troubles start at the conceptual level: when it comes to the green transition, ‘finance’ can be a tricky term. Some uses, such as ‘public finance’, ‘energy finance’ and ‘climate finance’ are tied to budgets and policy planning, rather than financial services and private market infrastructure. Other terms, such as ‘blended finance’ and ‘digital finance’ are more financial-services adjacent but still well outside the scope of this paper: the former refers to public-private project funding and the latter is used when discussing tokenisation and new payment technologies.

‘Sustainable finance’ is financial services, yet somehow set separate from the main finance agenda. Much of the market either ignores sustainability disclosures or makes its own indicators for suggesting where and how to invest. Sustainable finance is frequently described as encouraging investors to put their money into the green transition and to move away from fossil fuels. But in practice, management companies often compile climate-related indicators more as a way of choosing where not to invest, such avoiding regions hit by drought or rising sea levels, instead of providing the financing for those areas to adjust. Big asset managers frequently vote against sustainability initiatives (Schoenmaker, 2026) to protect their own bottom lines. 

The preferred branding for sustainability-minded investment is constantly shifting in the face of political headwinds, especially the anti-climate tone of Trump-era US politics. The once popular ESG label has given way to CSR, which itself has been replaced by more anodyne terms such as ‘resilience’ and ‘security’³⁰. Geopolitical tensions mean standard setters and fund managers must revisit political decisions, such as whether nuclear power or defence spending can qualify. The EU has been an early battleground for these debates³¹. For a mix of compliance and reputational reasons, firms have introduced restrictions on defence investment and funding, which means the European Commission may need to explicitly tie security to its sustainability goals if it wants to attract private capital to the EU’s strategic buildup³².

To cut through the noise, the European Union should revamp its approach in a way that is more market-oriented, less dramatically political and realistic about its influence over asset allocation. The following sections offer some suggestions on how to move in this direction.

4.2 Less politics, more integration

Europe’s most significant financial-services integration advances tend to happen on files that are managed on a technical and collaborative level, rather than in service of a political headline. Two examples are joint debt and cross-border trade settlement. The debates on how and whether the EU should have an officially permanent safe asset, and on completing the much touted capital markets union, have been loud, yet the biggest victories in this area have happened largely under the radar: the European Commission’s diversified funding strategy and unified funding approach³³, which created a single trading market for all EU-issued debt regardless of spending commitments, and the move to T+1 settlement, in which the EU and the United Kingdom are working to simultaneously shorten trade settlement timelines by one day.

For sustainable finance rules to be effective, they need to regulate finance and not try to govern other areas disguised as finance. Some climate-related information is clearly financially material, but other requested data may be less relevant to investor decisions. That other data may still be important, but should be addressed by other means. If the EU wants more data or more controls than the market consensus, it can address that through other channels. Trying to write in an inherent market-based incentive to change behaviour could work at cross-purposes to market dynamics. Instead, the EU should create the best possible capital market it can, green finance included.

Recommendations: Lower the political temperature on finance as much as possible by focusing on technical challenges rather than weaponising disclosures to score points in the global climate debate. Follow through on pledges to improve the single market for financial services and strengthen EU capital markets overall, by implementing more elements of the Savings and Investments Union and banking union integration channels. 

4.3 Asset classes

The EU’s current disclosure system largely revolves around bond markets. This means the framework is not instrument-neutral (Merler, 2025) and also reinforces the EU’s longstanding dependence on debt compared to equity. In general, Europe should seek to increase equity and venture-capital participation to reduce its reliance on bank lending (Arampatzi et al, 2025) and other forms of debt. Sustainable finance is supposed to be more forward-looking than other parts of the market. It should make more use of forward-looking financial instruments.

Recommendation: include more kinds of assets in sustainable finance planning, including equities.

4.4 The role of subsidies and guarantees, especially in securitisation

Government interaction with markets should be aimed at supporting the creation of public goods. To the extent that sustainable finance rules are intended to push investment into certain categories, policymakers should ask hard questions about what society wants more of. What is the private sector capable of providing on its own, and where are the gaps? How can small government subsidies or first-loss guarantees jumpstart private investment?³⁴

In a sustainable finance context, these questions are most important when considering financial engineering and specialised products such as securitisation, the practice of bundling loans and creating fixed-income securities with varying levels of risk. The EU’s 2024 series of competitiveness reports (Draghi, 2024; Letta, 2024; France Trésor, 2024) all suggested the EU could make more use of securitisation as part of its capital markets union initiatives.

France Trésor (2024)³⁵ went into the most detail, suggesting that the EU implement a platform for centralised trading and possibly support parts of the market with government guarantees. While the infrastructure parts of these proposals are welcome, it was wrong on guarantees, recommending government support for mortgage-backed securities, which would import the worst part of the US securitisation landscape³⁶. 

A better approach would be to focus on loans to small and medium-sized enterprises (SMEs) or on green loans. These loans are hard to bundle or market on a wide scale because they are not standardised and require significant due diligence by would-be investors, both on the company or project itself and also on the national regulatory environment around that company/project. This could be done for taxonomy-aligned loans or using some other definition – for example loans to SMEs for a smaller list of pre-approved purposes. 

Recommendation: limit securitisation-linked government guarantees to green loans and develop first-loss structures that can smooth risk differences, allowing loans to be bundled and marketed more easily.

4.5 Too many standards, too many taxonomies

Despite the EU’s efforts to set a global standard for sustainable finance, and despite the EU’s relative success as a green-bond issuer, the global landscape of disclosures, protocols and rating protocols has not consolidated around the EU’s version. Companies must grapple with credit ratings, ESG ratings, audits, secondary opinions and bespoke indicators, along with regulatory requirements.

The EU’s approach, of reducing scope rather than reducing complexity, is not helping. Companies face multiple deadlines, clashing standards and in some cases the need to keep multiple sets of books in their compliance efforts. While it may make sense to exclude smaller companies from some requirements, simply moving the bar up does not address all the issues at stake.

At their best, sustainable finance disclosures are used by companies to get a better handle on their own practices, compare themselves with their peers and make changes to align their business model with the needs of the green transition. This, in turn, can lead to innovation, jobs and growth, as well as more care for the natural environment.

At their worst, these disclosures become compliance nightmares, demanding tremendous resources from companies to produce reports that virtually no one looks at. This data can be hard to compare across borders and asset classes, meaning even macroeconomic modelers may struggle to make use of it.

In practice, sustainable finance market participants are developing practices to support their own business and work constructively with the EU framework. The EU can do more to make its policies fit for purpose, particularly in the European Commission’s implementing acts and related market guidance. 

Recommendations: When putting the new framework into practice, prioritise simplification for everyone rather than compliance tiers by streamlining the number of forms to file and data points to track. Reduce the role of the EU taxonomy to specialised use cases, by using market standards as the main benchmark for new policies and regulation updates. 

4.6 Global cooperation is better than global competition

The green transition is a policy integration problem. Solving it fundamentally requires money, not disclosures for their own sake. Transparency policy therefore needs to prioritise practical considerations to achieve its aim.

In general, global market standards are more effective than detailed government intervention. The role of governments and policymakers should therefore be to generate “voluntary adoption momentum” from companies and investors.

Currently, the EU’s double materiality mandate does not appear compatible enough with ISSB to allow for a passporting approach. Fixing that compatibility should be the priority. 

There are various ways this could be conceptualised without dropping double materiality completely. One approach would be to split up how double materiality is reported. Elements that are intended to change behaviour but do not fit within the ISSB framework could be reported separately, for example, ideally in a simplified and high-level way that makes firms evaluate their impact on nature. This would lessen the back-door regulation aspect of the current regime, while still allowing authorities to demand more quantifiable information about environmental impact. In this hypothetical scenario, nature and environmental impact disclosures might be easier to assemble if they do not need to quantified with the same detail and inter-compatibility as the financial information.

Sustainability disclosure for financial markets needs to provide information that markets care about, and ISSB’s evolving global standards have channelled and strengthened that relevance. Providing extra information that governments and activists care about may be a worthy goal, but it can be handled separately and ideally with a lower compliance burden. 

Recommendations: EU policymakers should prioritise compatibility with ISSB and ICMA standards to facilitate integration globally, as well as within the single market. Double materiality should be revamped so that it can act as a ‘bolt-on’ to ISSB, rather than requiring two full sets of calculations.

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