The European green deal, retail investors and sustainable investments: A perspective article covering economic, behavioral, and regulatory insights

The purpose of the European Green Deal and the regulation associated with the so-called EU Taxonomy for Sustainable Activities is to lead capital flows towards sustainable investments. According to the European Commission this is necessary to finance solutions for the immense challenges ahead, such as climate change, social inequality, and loss of biodiversity. However, academic research raises concerns that sustainable investments may earn lower risk-adjusted returns in the long run. The European Supervisory Authorities identify greenwashing risks and pronounce the limited ability of retail investors to make informed investment decisions. The aim of this perspective article is to provide suggestions for a regulation on relevant information on sustainable investments provided by financial service providers to retail investors. Therefore, the existing regulations are put in relation with recent research on investments considering ESG issues. To enable retail investors' self-determined decision-making, financial service providers such as banks, mutual funds, and financial advisors must provide easily accessible, clear, and easily understandable information regarding the ESG-conformity of the offered financial products. In addition, financial service providers must inform retail investors about some specific risks that can arise from a narrow focus on ESG assets such as under-diversification, an overweight of large stocks, and returns that can be lower than the market return.