Sustainable finance versus environmental policy: Does greenwashing justify a taxonomy for sustainable investments?

Roman Inderst and Marcus Opp

Journal of Financial Economics, 2025, vol. 163, issue C

Abstract: Our paper analyzes whether a planner should design a taxonomy for sustainable investment products when conventional tools for environmental regulation can also be used to address externalities arising from firm production. We first show that the private market provision of ESG funds marketed to retail investors involves greenwashing, so that a mandatory taxonomy is necessary to generate real effects of sustainable finance. However, the introduction of such a taxonomy can only improve welfare, on top of optimally chosen environmental regulation, if financial frictions constrain socially valuable economic activity. Otherwise, environmental policy alone is sufficient to optimally address externalities.

Keywords: Greenwashing; Sustainability; EU taxonomy; Sustainable Finance Disclosures Regulation; ESG funds; European Green Deal (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:163:y:2025:i:c:s0304405x24001776

DOI: 10.1016/j.jfineco.2024.103954

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