Sustainable Finance 3.0: Establishing a Framework for Assessing the Environmental Impact of Financial Products

5. August 2024

Master thesis

The following topic is suitable for MA students. For all the details, please refer to the full topic description.

If you are interested in the following topic, please get in touch with Dr. Brigitte Bernard-Rau(brigitte.bernard-rau"AT"uni-hamburg.de).

Sustainable Finance 3.0: Establishing a Framework for Assessing the Environmental Impact of Financial Products

Mobilising private capital is essential for achieving sustainability goals such as the Sustainable Development Goals (SDGs) and the European Green Deal. One goal of the EU (European Union)’s Sustainable Finance agenda is to reorient capital flows towards sustainable investments.

As a key step in this reorientation, the EU Taxonomy Regulation introduces a green classification system that translates the EU’s climate and environmental objectives into detailed technical criteria for specific sustainable economic activities. The Taxonomy helps investors identify financial products that pursue environmentally sustainable objectives and allocate capital towards sustainable investments, effectively channelling private investments into sustainable activities. An economic activity qualifies as environmentally sustainable if it: a) substantially contributes to one or more of the six environmental objectives cited in the Taxonomy[1]; b) does not significantly harm any of these environmental objectives; c) complies with minimum safeguards set out in alignment with the OECD Guidelines for Multinational Enterprises, the UN Guiding Principles on Business and Human Rights, the ILO Declaration on Fundamental Principles and Rights at Work, and the International Bill of Human Rights; d) meets technical screening criteria established by the European Commission.

Additionally, the EU Sustainable Finance Disclosure Regulation (SFDR) enhances transparency regarding how financial products and financial market participants integrate sustainability risks into their investment decisions and advice. This transparency allows end investors to effectively compare financial products concerning their environmental, social, and governance (ESG) risks and sustainable investment objectives. Financial market participants must publish and maintain information on their websites about the methodologies used to assess, measure, and monitor the environmental or social characteristics and impacts of sustainable investments. This includes data sources, screening criteria for underlying assets, and relevant sustainability indicators. Periodic descriptions of these financial products should provide the overall sustainability-related impact using relevant sustainability indicators, or, if an index is used as a benchmark, a comparison of the product’s impact with that of the designated and broad market indexes.

However, the lack of a clear definition for "impact investments" in the EU regulatory framework endangers the reorientation of capital and increases the risk of impact washing. Therefore, even though initial steps have been taken, this Master Thesis aims to propose a conceptual basis for categorising “impact products” and develop an “impact label” for these products, covering both investments in already sustainable assets and those in transitioning assets. The project's goal is to establish a reliable framework for measuring the climate and environmental impact of financial products.