The European Commission (EC) has been pursuing its Sustainable Finance Action Plan since 2018 to redirect capital flows toward sustainability and to support the Paris Agreement’s goal of limiting global warming to 1.5 degrees Celsius above pre-industrial temperature levels. And over the past six years, the European Union (EU) has introduced several key regulations and directives, along with guidance from the European Securities and Markets Authority, to combat greenwashing and ensure transparency in sustainable finance.

In December 2023, CFA Institute conducted a survey of our members in EU member states on the current and future direction of the EU regulatory policy on environmental, social, and governance (ESG) investing. The goal of our “CFA Institute Survey Report on the ESG Regulatory Framework in the EU” is to deliver deep insights from our members in the EU on the perceived benefits and challenges of EU legislation on sustainable finance. Our report, which is based on the survey’s findings, proposes solutions to address ESG risks and issues and offers recommendations to enhance ESG regulatory measures without weakening investor protection.

To prevent redundancy in reporting by European companies, EU regulators have been making efforts to align the European Sustainability Reporting Standards (ESRS) and International Sustainability Standards Board (ISSB) standards. Corporate governance remains a challenge in the region, however, due to EU members states’ traditional authority over company laws. Despite such steps as the Shareholder Rights Directive II (which is meant to encourage shareholder engagement by listed companies and increase transparency), further measures are needed for cross-border shareholder engagement and investor protection.

In summary, the EC’s Sustainable Finance Action Plan has made noteworthy progress in regulating sustainable finance, with a focus on transparency, ESG integration, and global harmonization. Challenges remain in corporate governance and cross-border investor engagement, prompting continued efforts to strengthen regulatory measures while ensuring investor protection.

Survey’s Key Findings
Among the important findings of our survey is that EU legislation on sustainable finance and rising demand from European investors are pushing asset managers to consider ESG factors in their investment strategies. Challenges include unreliable ESG data, high data collection costs, and the need for staff training. Also, retail investors are confused by excessive and complex sustainability information, which will likely become more complicated with the increased sustainability reporting under the new ESRS framework. Clarifying language in the EU’s Sustainable Finance Disclosure Regulation (SFDR) can improve ESG disclosures and reduce greenwashing. Our survey finds that the key issues with the EU Taxonomy Regulation are complex disclosures and lack of comparable ESG data. Survey respondents believe global regulators should align on sustainability definitions and ensure transparent ESG ratings.

Policy Recommendations

• To redirect capital toward sustainable activities, EU regulators should continue to lead the global sustainability agenda and develop tailored ESG disclosure requirements and taxonomies aligned with financial market needs.
• Clear and consistent ESG terminology across the legislative framework is crucial for uniform implementation and reducing rule interpretation variability.
• Addressing the challenge of unreliable ESG data and associated costs is essential for compliance with current disclosure requirements.
• During the SFDR review, the European Commission should clarify the fund categorization system under Articles 8 and 9 to simplify ESG disclosures for investors and mitigate greenwashing risks.

The survey follows one we conducted of our global membership in 2021, which focused on ESG factors in investment decisions. That survey’s results indicated investors’ belief that ESG integration should be driven by market forces rather than mandated by regulators and that financial materiality remains a priority in integrating ESG issues into investment performance.