The European Eco-label on financial products
The European Ecolabel project on financial products is part of the European Commission’s initiatives under its 2018 action plan for financing sustainable growth.
Together with other measures, it is intended to encourage the orientation of financial flows towards sustainable investment and, in particular, to mobilise the assets held by retail savers to this end.
A growing number of studies have shown that a large majority of retail investors feel concerned by the issues raised by sustainable development and want to use their investment decisions as a lever to generate changes in the real economy in line with their values.
The European Ecolabel mechanism was therefore considered as a potentially suitable response to this expectation in that it would be likely to “(i) enable savers concerned about the environmental impact of their investments to make informed choices and contribute to the green transition and (ii) encourage the industry to develop financial products with a reduced environmental impact or a positive environmental impact” (EC Staff Working document on Sustainable Products in a Circular Economy, p. 11 – 2019).
Indeed, in accordance with the provisions of Regulation (EC) N° 66/2010 establishing the EU Ecolabel, the Ecolabel has the explicit objective of allowing the identification – through a set of criteria defined through a consultative process – of products with the best environmental performance in their category, assessed on the basis of a scientifically-based analysis of their environmental impacts.
However, the two sets of criteria successively proposed by the JRC of the European Commission to date for the Ecolabel on financial products do not comply either with the provisions of the above-mentioned Regulation or with the environmental policy objectives set by the European Commission’s action plan.
Indeed, these criteria are mainly based on the measurement of the exposure of financial products to companies with activities considered “green”, in particular with regard to the Taxonomy developed in parallel by the European Union.
However, the hypothesis that the degree of exposure of a financial product to such activities would enable it to have a real environmental impact or would constitute a reliable indicator of it is not based, particularly for retail products, on any scientific basis in the current state of research, as has been amply demonstrated by the work of the main authors cited by the JRC itself.
Nor is there any scientific basis for the hypothesis, also used by the JRC to justify its approach, that investor enthusiasm for such products would make it possible to achieve or measure such impacts.
This reasoning is in fact based on a recurring confusion between the environmental impact of the companies being invested in and the investor’s own contribution to this impact, even though the assessment of the latter parameter must be the very basis of any relevant labelling process.
The criteria proposed to date therefore do not allow the environmental performance of financial products to be rigorously measured and are therefore contrary to the very essence of the Ecolabel mechanism.
Furthermore, the exposure thresholds initially proposed to make a financial product eligible for the Ecolabel reduce the investment universe to an insignificant portion of the market, and the JRC drastically lowered them in its second proposal. As a result, products that are only marginally invested in taxonomic sectors would be eligible, in complete contradiction with the assumption that the best environmental performance of Ecolabelled financial products could be inferred from their role in increasing investment in taxonomic activities.
Furthermore, the focus of the Ecolabel on taxonomy-related indicators presupposes the availability of relevant data for the Ecolabel to be practicable. Such data will not be available for several years, assuming that regulations are properly enforced, which is not self-evident. Moreover, only issuers subject to Community law will be required to publish such data, thus leaving a considerable number of players outside the scope of the proposed criteria.
Last but not least, by allowing financial products deploying investment strategies that are indifferent to the credible demonstration of their impact in the real economy to take advantage of the Ecolabel system – a system that has nonetheless been developed.