5.CONCLUSION

Financing the transition to a more sustainable economy, i.e., financing activities “becoming green”, has received increasing attention. Several (international) fora and working groups, such as the International Platform on Sustainable Finance, the G20 Sustainable Finance Working Group, or the German Sustainable Finance Advisory Committee of the Federal Government took up this issue. Furthermore, regulation and private initiatives have been introduced to facilitate investments contributing to a low-carbon future acknowledging that finance is also needed for economic activities in transition (instead of those that are already green)

To successfully finance the transition, investment opportunities for institutional and retail investors need to be available. These need to ensure that the financing credibly supports the transition and is in line with the emission pathway of the Paris Agreement. Transparency thereby has a crucial role since suitable investments need to be identified. A promising way to channel more retail investments into the transition are Ecolabels. However, the award criteria of ecolabels for equity funds often focus on the current sustainability performance – however, the first steps have been taken to integrate the transition dimension to a similar extent. Our analysis shows that investor engagement towards a more sustainable corporate performance is the most present criteria to consider transition aspects. The proposed EU Ecolabel and the NordicSwanEcolabel bothgobeyondthisandrepresentfrontrunners toincentivisemoreretailinvestments considering forward-looking information. Nevertheless, 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 their business model

• Define clear KPIs and science-based thresholds for the qualifying criteria

• Specify the criteria for the engagement process

We believe that climate and other sustainability targets can only be reached if the backward-looking perspective is complemented by a forward-looking approach. The financial industry, real economy, as well as researchers and policy makers should elaborate on how to put this into practice.