Sustainable finance: the Swiss army knife of the financial market 

Generally speaking, readers should be wary of superlatives. In the digital world, which has already seen its share of hype followed by disappointment, Peter Thiel once summed things up in the observation that “we wanted flying cars, instead we got 140 characters.” The same pattern can be seen in sustainable finance. The European Commission’s action plan for financing sustainable growth, presented in 2018, set the tone with its goal of reorienting capital flows towards sustainable investments and protecting the financial system against climate risks. The European Green Deal, launched just a year later, ramped expectations up even further. 

Following a raft of regulation including the CSRD (Corporate Sustainability Reporting Directive), CSDDD (Corporate Sustainability Due Diligence Directive) and SFDR (Sustainable Finance Disclosure Regulation), the enthusiasm has dwindled somewhat – and not just in the EU. It is true that investment products which disclose in accordance with Articles 8 and 9 of the SFDR currently account for almost 50% of assets under management in the EU, and that Europe is by far the largest market for sustainable funds, with up to 84% of the assets invested in them worldwide. However, less money is flowing into transition than was originally hoped.

From moral considerations to investability and impact 

The overhaul of the SFDR announced on 20 November 2025 is a good opportunity to highlight various design flaws and their causes. For the avoidance of misunderstandings, it should be emphasised from the outset that some of the regulatory measures introduced make sense. It is important to consider environmental and social factors as well as economic aspects when making decisions; indeed, there is no alternative in the long term. But their intended impact is not easy to achieve. Sustainable finance is a multifaceted approach which, like a Swiss army knife, contains a range of tools for different applications. These can best be categorised in terms of their possible motivations: in the early days, 100 years ago, purely moral considerations were very much to the fore, but by the end of the 1990s the focus had shifted to risk/return calculations. Since the 2010s, attention has moved to environmental and social impact. However, while a clear conscience demands the consistent avoidance of investments in critical companies, the idea of transition means supplying capital to the very enterprises that are most at fault – accompanied, of course, by engagement with companies through “active ownership” or instruments such as sustainability-linked loans.

Sustainable finance needs a basis  

The question then becomes: who is able to take decisions and assume responsibility? The instinctive response – that this is a matter solely for banks and asset managers – is inadequate for two reasons: first, financial intermediaries make investments solely on behalf of their clients; and second, banks are obliged to consider not just impact but also long-term financial viability and risk when providing finance. The key to achieving the necessary transformation, then, lies in the framework, which has to be set by politicians, all the while keeping a close eye on the investability and financeability of the projects concerned. If economic activities give rise to environmental or social costs that need to be borne by the general public, something like a CO2 tax or a certificate system needs to be introduced into the market. This will also dispense with the need for complex bureaucratic tools such as a taxonomy.  

In summary, then, the sense of disillusionment that has crept into the debate on sustainable finance is mostly the consequence of false assumptions and overoptimism, on the part of politicians especially. What is needed is a broad understanding of the potential and limitations of the “Swiss army knife” that is sustainable finance. And, building on that, a framework that provides a solid foundation for a financeable and investable transition.