Investment funds are responsible for substantial environmental and social impacts with trade-offs

Abstract

Abstract As finance takes on a pivotal role in sustainability transitions, regulations that mandate impact reporting at financial product level are emerging worldwide. Without standardized and reliable indicators, sustainable investing risks being watered down by greenwashing. We show that life-cycle-based, ready-to-use impact indicators can be adapted for sustainability assessment of financial products. We designate 13 environmental and 13 social impact indicators aligned primarily with the EU Sustainable Finance Disclosure Regulation, one of the first pieces of regulation mandating sustainability reporting for financial products. Two major advancements of our framework are the coverage of social impacts and the direct policy relevance. As practical application, we estimate the impacts of a sample of 230 self-labelled sustainable investment funds for all indicators. We show that these investment funds are exposed to significant environmental and social impacts via their investee companies. Total estimated impacts vary between 2.1 and 28.4 times the impacts associated with the consumption of a one million EU citizens, depending on the indicator. Trade-offs could be signalled between and within environmental and social indicators. Finally, most impacts can be traced to a small number of publicly listed companies, which investors could engage with, in order to drive change.