Investor Impact in Transition Finance: Learning from Ecolabels

February 21, 2023

This publication is a first overview paper, originating from our ClimLabels project. This paper sheds light on the evolving transition finance landscape with a particular focus on Ecolabels and what we can learn from them to construct transition finance products. This paper builds partially on our input on the UK’s proposed transition label.

What constitutes the transition finance landscape?

Massive investments from the private and public sector, as well as a supporting financing framework, are needed to reach net zero targets. While there has been a surge in interest in investments that are currently sustainable (such as renewable energy investments), there is a need for stronger financial incentives to decarbonise currently emissions-intensive sectors (such as manufacturing or agriculture). Creating better financing conditions for economic activities becoming green lies at the heart of the frequently discussed term “transition finance”.

Over the past years, a packed transition finance landscape has emerged. A growing number of companies set science-based targets, develop transition plans, or make green investments. Investors collaborate to collectively shift investment volumes into the transition.

How can investors contribute to the transition?

In general, there are two direct channels through which investors can contribute to the transition of the real economy: capital allocation and engagement. Forward-looking information about portfolio companies can guide the allocation of capital to companies following credible transition pathway. This information can be, for example, the existence of an emissions reduction target or the level of investment in sustainable technologies. This can be complemented by an active engagement process, i.e., through voting rights and dialogue.

What is the role of Ecolabels?

Ecolabels  for financial products are an existing illustration of how both mechanisms – capital allocation and engagement – intertwine and can be applied to financial products. This report reviews eight Ecolabels for financial products and how they address the transition. To date, most labels are dominated by backward-looking criteria and current sustainability performance which might exclude companies that can contribute to the transition. We find that the EU Ecolabel and the Nordic Swan Ecolabel are frontrunners regarding the integration of forward-looking elements. We highlight four principles to (better) include transition characteristics in Ecolabels, namely:

  • Alignment with the Paris Agreement and other environmental targets.
  • Reduce the investable universe by excluding companies without willingness to transform.
  • Define clear KPIs and science-based thresholds for the qualifying criteria.
  • Specify the criteria for the engagement process.

Read the report in full here: