Several factors have contributed to the evolution of sustainable finance labels.

Firstly, increased awareness of global sustainability challenges, such as climate change, social inequality and environmental degradation prompted a realization that the financial sector could actively address these issues. Simultaneously, increasing demand for responsible investing led investors to seek opportunities aligning with their values, spurring the development of financial products incorporating ESG criteria.

As this demand surged, financial institutions incorporated sustainability considerations into risk management practices, recognising the long-term financial risks associated with environmental and social challenges. Governments and regulatory bodies also acknowledged the significance of sustainable finance, implementing policies that mandated the disclosure of ESG practices by financial institutions, thereby enhancing transparency in the industry.

Lastly, the United Nations’ Sustainable Development Goals (SDGs) provided a comprehensive framework for addressing global challenges, prompting financial institutions to recognise their role in supporting these goals. Sustainable finance labels subsequently emerged as a means to identify investments that positively contribute to the SDGs.

These are just some of the many factors. 

As sustainability continues to be a key focus globally, the development and adoption of sustainable finance labels are likely to evolve further.

The assessment of the sustainability profile of a financial product seeking to receive a label typically involves a comprehensive evaluation by labelling agencies. These agencies follow established frameworks and criteria to determine whether the financial product meets specific environmental, social and governance (ESG) requirements. The assessment process can vary but it generally includes the following key steps:

• Adherence to established criteria: Labelling agencies develop specific criteria or requirements that financial products must meet to qualify for a sustainability label. These criteria may cover environmental impact, social responsibility, and governance practices. The criteria are often aligned with global sustainability goals or industry best practices.
• Documentation review: Financial institutions seeking a sustainability label are typically required to submit documentation detailing their sustainability practices. This may include information on the environmental and social impacts of the underlying assets, risk management processes, and governance structures.
• Data verification: Labelling agencies may conduct a thorough verification of the data provided by the financial institution. This can involve independent audits or assessments to ensure the accuracy and reliability of the information submitted.
• Performance measurement: Labelling agencies assess the financial product’s performance against predefined sustainability metrics. This may involve evaluating the product’s contribution to specific environmental and social goals, such as carbon reduction, community development, or ethical business practices.
• Adherence to standards or frameworks: Labelling agencies assess whether the financial product aligns with established industry standards or recognised frameworks. For example, they may refer to global initiatives like the Principles for Responsible Investment (PRI), the Sustainable Development Goals (SDGs), or the Partnership for Carbon Accounting Financials (PCAF), among others.
• Continuous improvement and reporting: Financial products seeking a sustainability label may be required to demonstrate a commitment to continuous improvement. This involves setting and reporting on sustainability targets, as well as providing regular updates on the product’s environmental and social impact.
• Third-party verification: Some labels involve third-party verification processes. Independent auditors or assessors may be engaged to review and validate the financial institution’s sustainability practices, ensuring impartiality in the assessment.
• Certification decision: Based on the overall evaluation, the labelling agency decides whether to assign the Label or not.  If the financial product meets the established criteria, it is awarded the sustainability label. If not, the reasons for non-certification are typically communicated to the financial institution.
• Monitoring and renewal: Sustainability labels often come with ongoing monitoring requirements. Financial institutions may need to regularly report on their sustainability performance to maintain the label. Periodic renewals ensure that the institution continues to meet evolving sustainability standards.

Different labelling agencies may have unique approaches and frameworks for assessing sustainability profiles and the specific criteria can vary across labels. The overall goal is to provide investors and consumers with confidence that the financial product adheres to recognized sustainability standards and contributes positively to environmental, social and governance objectives.

The perception of sustainable finance labels in the market and among customers has been generally positive and there has been a growing awareness among investors and consumers about the impact of financial activities on sustainability issues. As a result, there has been and still is an increasing demand for investments that align with environmental and social values. Since the labelling process involves assessing adherence to specific sustainability criteria, it also helps build trust and credibility in the market.

However, customer perceptions can vary, and some stakeholders may scrutinize the authenticity of sustainability labels. Therefore, ongoing efforts to enhance transparency, reporting and verification processes are critical for maintaining and improving the positive perception of sustainable finance labels in the market. As the sustainable finance market continues to evolve, customer awareness, education, and confidence in these labels are likely to play a central role in shaping the market’s perception.

Sustainable finance Labels are subject to guidelines and/or requirement which are provided by the relevant label organisation. However, those are voluntary and aim to provide a common framework for issuers, investors, and other stakeholders.

Additionally, regulatory bodies in different jurisdictions have mandatory  guidelines or requirements to enhance transparency and consistency in sustainable finance, i.e. SFDR – Sustainable Finance Disclosure Regulation), EU Taxonomy Regulation, national & international initiatives.

It is therefore crucial to stay updated on the regulatory developments in the specific jurisdiction or market interested in sustainable finance.

They have one common goal, to support sustainable finance.