Financing the Transition to Sustainability: SMART Reform Proposals

By Jay Cullen, University of York, Jukka Mähönen, University of Oslo and Heidi Rapp Nilsen, Norut Northern Research Institute.

6 May 2020, SSRN

Image may contain: Text, Font, Line, Brand, Trademark.


Financial markets are fundamental to a successful transition to sustainable market activity. Addressing unsustainable financial practices is vital to realizing the EU’s commitments on sustainability, as expressed for instance in the European Green Deal of December 2019. Yet, investments in unsustainable projects – routinely funded by large EU banks – have not been addressed sufficiently by EU financial regulators, in spite of the introduction of the EU Sustainable Finance Initiative (SFI) in 2018. The SFI lacks a systematic integration of sustainability factors in the actions proposed, limiting focus on selected environmental issues, especially climate change. It also relies too much on the existing incentive structures for private actors in financial markets. Such reliance is unlikely to deliver sufficient sustainable investments. On the other hand, the EU has made considerable progress regarding to prevent ‘greenwashing’ of financial products, and the development of consultative processes and expert groups speaks of a genuine commitment to deliver, which may be realized in the present EU Parliament and Commission. However, the legitimacy and effectiveness of this EU action needs to be assured, and there is a danger the SFI will not achieve its goals, due to limitations in the proposals under it.

In this Report the SMART Project presents its analysis and reform proposals on regulation governing the funding of investments both in the EU and between the EU and third countries. The regulation discussed concentrates firstly on the banking system, including central banks and private banks but also private and public institutional investors, as much of the short-term and narrow pressure for maximization of returns to investors comes from the investment supply chains of financial markets and institutional investors. The SMART Project also proposes revision of the European Central Bank mandate and operations, guidelines for bank risk assessment, and regulation of banks. Secondly, the SMART Project proposes broadening and strengthening the SFI with proposals of amendments in the recent Taxonomy, Disclosure and Benchmarks Regulations to cover all economic activities and financial instruments and all market actors, both public and private, obliging them take into consideration sustainability in their investment decisions as well as benchmarks provided by index and benchmarks providers. In the final part of the Report the increased focus on foreign investments outside the EU is discussed.

University of Oslo Faculty of Law Research Paper No. 2020-10. Available at SSRN: or
Published July 3, 2020 9:04 AM - Last modified Aug. 19, 2022 2:59 PM