Sustainable financial products, too complex to label?

Is it the responsibility of the financial industry to develop sustainability labels for financial products?

There is a great desire for sustainability labels in the financial market. The SFDR (Regulation (EU) 2019/2088) does not provide labeling requirements. It addresses information asymmetries through disclosure requirements differentiated by product category.

Sustainability preferences are complex and develop dynamically. They can only be adequately represented by simple labels to a limited extent. The basic idea of the SFDR is not to prescribe labels, but to align the disclosure requirements for financial products with ESG preferences and thus the information requirements of their potential investors, is underpinned by economic theory.

Private market mechanisms and intermediaries should now make use of the SFDR disclosures and contribute by establishing their own labels to the reduction of information processing costs.

Prof. Dr. Katharina Hombach and our partner Prof. Dr. Bernd Geier have commented on this in issue 1/2024 of the German Journal on Bank- and Capital Market Law, published by C.H. Beck.

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