Transition finance must be at the core of sustainable disclosures reform

(...) Different approaches can contribute to sustainability objectives through different channels. But their capacity to direct capital towards real-world investments or to influence issuer behaviour varies significantly. Yet, the proposal treats them as interchangeable in meeting eligibility thresholds, without requiring a consistent demonstration of their potential to contribute to real-economy outcomes.

Product compliance is in effect defined through allocation to recognised investment pathways, introducing into the framework a Trojan horse for approaches that operate entirely within the financial sphere and risk amounting, at best, to “greenwishing” and, at worst, to greenwashing.

The treatment of EU climate benchmarks illustrates and compounds this problem.

First, allocation to products that replicate or reference such benchmarks counts towards meeting the investment threshold.

Second, products that replicate or reference them enjoy privileged treatment. Because of their standardisation and the ability to verify them, they may qualify for the sustainable or transition categories without meeting the same requirements as other products — most notably, the need to demonstrate a clear and measurable objective.

These benchmarks are built around a portfolio-level carbon exposure metric that must be reduced relative to the market and compressed over time. This leads to systematic reallocation away from high-emitting sectors and assets, irrespective of their transition relevance or performance. This may serve as a hedge against carbon risk, but it does not direct capital towards transition.

On the contrary, it can shift exposure away from sectors central to decarbonisation, such as power, materials and heavy industry. 

Metric design compounds the problem. By combining company-reported direct and energy purchase (Scope 1 and 2) emissions with modelled value chain (Scope 3) emissions, which reflect sectoral relationships and involve multiple counting, the framework drowns company-specific decarbonisation signals in sector-level noise.

When emissions intensities are used, normalising by enterprise value imports market volatility, weakening the link to underlying emissions performance. (...)