The EU Sustainable Finance Framework in Light of International Standards

This paper analyses the relationship between the EU sustainable finance legal framework and the most common international environmental, social, and governance standards. We find that standards included in the EU sustainable finance legal framework partly overlap with the international environmental, social and governance standards, while diverging as to the details. This overlap creates 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 the international environmental, social and governance standards. This may result in both upsides and downsides. On the upside, the EU sustainable finance legal framework could function as a pacemaker and facilitate impact measurement across the industry, while on the downside, we see additional costs for firms and resistance against the granular EU approach. At the same time, the EU sustainable finance legal framework lacks details on the social and governance dimensions. Here, reference to the international standards compensates for the lack of an EU social and governance taxonomy. While this allows for 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.