From International Norms to EU Leadership in Sustainable Finance

Introduction

The urgent need to finance the green transition began to emerge on the European Union’s agenda following the signing of the Paris Agreement on climate change in 2016, which became the principal international reference point for the EU’s sustainable finance agenda (Alexander, 2023). Shortly after, in 2018, the European Commission published the Sustainable Finance Action Plan to support the EU's transformation to a sustainable economy by taking into consideration environmental, social and governance (ESG) concerns. This was followed by the EU Green Deal in 2019, which repositioned sustainable finance as a principal instrument for achieving climate-neutrality (European Commission, 2018; European Commission, 2019). Sustainable finance seeks to redirect capital flows towards sustainable investment and include sustainability within financial decision-making. A variety of legislative acts have been adopted, including the Sustainable Finance Disclosure Regulation (SFDR) in 2019, the Taxonomy Regulation in 2020, and the Corporate Sustainability Reporting Directive (CSRD) in 2022. The central legal argument of this essay is that the EU has hardened climate international commitments, such as the Paris Agreement, into a complex framework of enforceable obligations for the financial market. First, this essay outlines the role of international law in shaping the EU agenda. Second, it examines how the EU transformed those commitments into binding hard law. Lastly, it argues that the EU even shapes global sustainable finance standards itself.

The Role of International Law in Shaping the EU Agenda

The international legal foundations of the EU's sustainable finance agenda rest primarily on the Paris Agreement, a binding treaty under international law. However, the fact that the Agreement binds its state parties does not mean it can reach the actors whose behaviour most needs to change, namely, private financial actors. This lies in the fact that

international agreements concluded by the EU only produce direct effect where they are sufficiently clear, precise and unconditional, as per the Kupferberg (1982) judgement.

The Paris Agreement’s most consequential provision for the financial sector is Article 2 (1)(c), which calls for “making finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development”. As legal scholars such as Ghaleigh (2020) observe, this content amounts to no real obligations as it is ambiguous and has no attached consequences for the financial sector. Private financial institutions bear no obligations under the climate regime as they are non-parties to it, hence making article 2(1)(c) function as a directional commitment rather than a binding instrument (Zhang, 2019).

The Paris Agreement has been invoked in courts in the past, most notably in the famous case Milieudefensie v Shell, but not as a source of binding obligation, but as contextual evidence of the standard of care under Dutch civil law. This shows the limits of the Paris Agreement, as it is a tool for political orientation rather than a legal obligation. The

EU’s Sustainable Finance Action Plan explicitly references these international instruments as “goals [which] will guide” the EU. It is this gap between treaty commitment and the private financial actors needed to fulfill it that the EU's sustainable finance legislative framework exists to address.

The Transformation of International Norms into Binding EU Legislation

While the Paris Agreement set the norms, supported by other tools such as the Sustainable Development Goals (SDGs) and the OECD guidelines, it only generated normative pressure without enforcement. The EU transformed these ideals into binding obligations.

The SFDR, a regulation, was the first to operationalise this architecture by establishing a mandatory disclosure regime for financial market participants. It requires the classification of products according to sustainability ambition, under Articles 6,8 and 9, and the substantiation of these classifications with specific disclosures on principal adverse

impacts. Enforcement here arises from national legislation and National Competition Authorities' regulatory action, and the regulation is subject to judicial review before the EU and national courts.

The taxonomy regulation hardened these expectations by further introducing a classification system for environmentally sustainable economic activities. This requires “sustainable activities” to contribute to one of the listed environmental objectives. Economic activities “ should take into account existing environmental indicators and reporting frameworks…as well as existing international standards, such as those developed by the OECD” (Taxonomy Regulation, 2020, para. 43).

The CSRD, which requires large companies to report on their environmental and social impacts under standardised criteria, completes this legislative architecture by incorporating what were previously voluntary international frameworks into binding EU law.

However, translating the ambition of international law into operational obligations for investors remains an ongoing challenge. The SFDR, Taxonomy Regulation and CSRD have hardened the norms, but full legal certainty in financial decision-making is still evolving as the EU Sustainable Finance framework still allows divergence in making sustainability claims across the financial market (Zetzsche et al., 2022).

The EU as a Global Leader in Sustainable Finance

With the complex sustainable finance framework the EU has developed, the EU now also functions as a global norm setter.

The EU introduces de facto compliance by foreign firms seeking access to the EU single market, without the EU needing to conclude international agreements to that effect (Bradford, 2020). The SFDR and CSRD are prime examples of this, as Non-EU financial institutions managing products distributed within the EU must comply with SFDR disclosure requirements, and large non-EU companies with significant EU operations fall within the scope of the CSRD. As a result, sustainability standards originating in Brussels are applied

voluntarily across jurisdictions by firms seeking to preserve market access in sustainable finance (Zetzsche et al., 2022).

Moreover, standard-setting at a global scale has been initiated through the EU institutions. For example, the Platform on Sustainable Finance, first set up in 2020, includes not only EU observers, but also international organisations and the private sector on a global scale. The EU response to international commitments has rapidly evolved into a legal framework generating standards and rules adopted abroad.

Conclusion

International law first provided the norms for the EU’s sustainable finance agenda, but alone it could not deliver the certainty and enforcement that is needed by the financial market in the EU. As discussed, the Paris Agreement established a binding state-level

commitment to align finance flows with climate objectives, but its ambition could not reach the private financial actors. Successfully, the EU's legislative response resolved this by converting directional international commitments into binding obligations through the SFDR,

Taxonomy Regulation and CSRD. The EU has not just legislated on climate, but it is restructuring the legal relationship between capital markets and sustainability, creating disclosure duties, classification systems, and reporting standards for the operation of financial decision-making. International law set the direction, and the EU sustainable finance legislation built the framework for private capital to follow, thereby reshaping globally the standards that first prompted it.

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Cover image: Matthew T Rader / MatthewTRader.com (CC BY-SA)