Complexity and uncertainty in sustainable finance: An analysis of the EU taxonomy

Book chapter

Abstract: The financial sector has the potential to facilitate societal change, but there is still a need for the sector to significantly transform. What is currently missed in the academic debate is that the finance field is deeply rooted in its discipline, which creates blindfolds to crucial aspects for enabling sustainability. Many investment strategies require ample information about issues of relevance, but complete information of all sustainability aspects may never become available. In these instances, it will not be possible to use prediction models and standard mathematical methods. This sheds light on the problem with using ESG (environmental, social, governance) rating metrics in their current form. It also gives rise to questions about the usefulness of establishing a taxonomy for sustainable economic activities. The European Union’s (EU’s) Sustainable Finance Initiative and its affiliated Taxonomy Regulation are therefore used as a case in this chapter. The Taxonomy Regulation is symptomatic of the lack of debate about to what extent it is possible to (a) identify and (b) measure all important aspects relevant for corporate sustainability. The chapter integrates and proposes the further use of multiple policy principles, including propositions on how to translate complexity and uncertainty into methodological and legal concerns. Emerging policy tensions from the EU’s post-COVID-19 recovery plan are also discussed, including implications for future research.

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Citation: Ahlström, H. and B. Sjåfjell. 2022. Complexity and uncertainty in sustainable finance: An analysis of the EU taxonomy. In: Cadman T. and T. Sarker (eds.) De Gruyter Handbook of Sustainable Development and Finance. De Gruyter, Berlin, Germany, pp. 15–40.

Keywords: EU Sustainable Finance Initiative, EU Taxonomy Regulation, ESG, complexity, uncertainty