The rise of sustainable finance: a strategic advantage
Given that over 50% of the assets managed in Europe incorporate Environmental, Social and Governance (ESG) criteria, sustainable finance is establishing itself as a driver of economic transformation. For investors, it is not only an opportunity to anticipate risks and monitor the growth of sectors in transition, but also a way for them to better access financing dedicated to sustainable technologies.
However, a by the Luxembourg Institute of Science and Technology (LIST) shows that many funds classified under Articles 8 and 9 of the Sustainable Finance Disclosure Regulation (SFDR) do not always have the expected impact, and even provide financing for companies with a high carbon footprint.
European regulations, such as the Taxonomy Regulation and the SFDR, aim to structure this market by setting specific and standardized criteria. Efforts are underway to improve their effectiveness, by developing criteria, simplifying application procedures and harmonizing data. Enrico Benetto, head of LIST's Environmental Sustainability Assessment and Circularity unit, is involved in these efforts as a member of the .
Ensuring a tangible impact
One of the key challenges lies in the assessment of ESG criteria. Current ratings, often established by private agencies, remain disparate and sometimes opaque. Furthermore, the availability and quality of ESG data varies from country to country, making comparisons more complex. “We need more transparency on the environmental and social data of the activities and their value chains to show that investments really do contribute to the green transition,” underscored Enrico Benetto.
For the last twenty years, his unit has been developing impact assessment methods based on Life Cycle Assessment (LCA). This approach assesses the environmental impact of the resources consumed and the pollutant emissions generated throughout the life cycle of products and technologies. Applied to sustainable finance, LCA makes it possible to assess all the related direct and indirect impacts. “Our studies show that indirect impacts, particularly those related to supply chains, can represent 60 to 80% of the total impact of the activities financed by the fund,” explained Enrico Benetto.
Governance and social criteria challenges
Beyond the environmental aspects, social and governance criteria are also decisive. “It is already difficult to obtain reliable data on a company's carbon footprint, meaning that quantifying criteria like the respect of human rights or equal opportunities in a global supply chain is even more difficult,” pointed out Enrico Benetto.
However, researchers have succeeded in developing a methodology, based on scientific databases, enabling these criteria to be integrated into the analysis of 230 investment funds classified as sustainable. This breakthrough, published in 2024 in , shows that ESG criteria can be evaluated in a scientifically sound manner. As better data becomes available, significant progress towards more transparent and efficient sustainable finance will be possible.
It is already difficult to obtain reliable data on a company's carbon footprint, meaning that quantifying criteria like the respect of human rights or equal opportunities in a global supply chain is even more difficult.
Towards better regulated and competitive sustainable finance
European regulations (CSRD, CSDDD) aim to increase transparency and reduce the risk of greenwashing by requiring companies to publish data on ESG criteria. While they are intended to ensure that investors make informed decisions, these laws also pose challenges for companies due to the detailed reporting requirements and the costs associated with verifying the data.
To respond to the need of companies for flexibility, at the end of February 2025, the European Commission proposed simplifying some of these obligations. The challenge now is to find a balance between reducing constraints and preserving transparency. “These adjustments pose the challenge of maintaining the aims of the environmental directives, which are essential for a rigorous assessment of funds in relation to their contribution to the energy and environmental transition, while at the same time supporting the competitiveness of European companies,” explained Enrico Benetto.
LIST, a partner for sustainable finance
Faced with these developments, LIST wants to help financial stakeholders better align their financing with regulatory requirements and opportunities as well as with climate objectives. Besides its expertise in LCA and the evaluation of sustainable investments, it is developing applications to detect regulatory overlaps, inconsistencies and gaps in the compliance, and to facilitate the collection and validation of ESG data.
The future of sustainable finance relies on robust methodologies, transparent data and reliable tools to measure the impact of investments.
“The future of sustainable finance relies on robust methodologies, transparent data and reliable tools to measure the impact of investments. This is how we will avoid greenwashing and build a financial system that truly contributes to the transition towards a future in which social and environmental benefits will be at the centre of our actions,” concluded Enrico Benetto.