Sustainable finance once held the promise of reconciling capital flows with planetary boundaries. It held the promise of helping to improve human rights. To accelerate transitions. For a time, it seemed plausible that markets - guided by transparency, ethical ambition and self-regulation - could drive the transition to a sustainable economy. But that narrative is faltering. Under the weight of political backlash, institutional inertia and misaligned incentives, sustainable finance is veering dangerously close to becoming a façade - more a branding exercise than a transformation tool.

In the United States, climate-aligned investing has become politically radioactiveand ESG policies are dismissed as ideological overreach, the Trump administration even brushing off climate risk disclosures as being part of “woke finance”.

That rhetoric has consequences: major US banks have withdrawn from global alliances like the Net-Zero Banking Alliance and those remaining are tempering their ambitions.

Europe, for years a regulatory pioneer, is now retreating. The EU’s taxonomy, sustainability information (SFDR) and reporting (CSRD) frameworks initially set the bar globally. Yet, faced with political and economic pressure, the European Commission is coming back on its commitments. The Omnibus proposal signals a shift from ambition to appeasement. Capital inflows into sustainable funds are slowing, and voluntary investor commitments are quietly diluted. This isn’t merely resistance; it’s a systemic recalibration.

At the heart of this retreat lies a deeper question: can transparency alone rewire capital markets for sustainability?

Other choices

The core assumption seemed plausible: if banks, investors and customers gain more insight into sustainability impact, they will make different choices. More data would yield better decisions. But the reality is less forgiving. There are a number of reasons for this.

The information ecosystem is dense, opaque, and often impenetrable for many investors. And even where there is clarity, the findings are hardly encouraging – only ten of the 76 largest asset managers meet only half of the relatively modest sustainability criteria. Many so-called sustainable funds remain invested in fossil fuels and controversial weapons. The dissonance is not just technical; it is moral.

Moreover, behaviour is not shifting. Most retail and institutional investors remain unwilling to trade return for impact. It may be that financial institutions now understand their exposure to sustainability risks, but understanding does not necessarily lead to action. Regulation, meanwhile, has proliferated in form but not in function. The multitude of sustainability rules suggests decisiveness, but is often the result of political horse-trading. What remains is technically complex but unambitious legislation. Lots of data, little direction.

Old model

The deeper truth is: we are still operating within the contours of an unchanged financial paradigm. Return maximisation, capital adequacy ratios and unpriced externalities continue to dominate. What passes for “sustainable finance” often entails little more than optimising within the same extractive model. It is about managing risk, rarely about financing change.

The current moment in time demands not abandonment, but maturation. Several institutional actors, for example a number of pension funds in the Netherlands, are beginning to set stricter criteria and and prioritizing transition-oriented investments. These are important signals. But without structural reinforcement, such efforts remain exceptions.

Steering

The missing element is steering. For too long, public policy has relied on soft instruments in order to nudge finance towards sustainability: transparency requirements, voluntary initiatives, labels. Here and there, attempts have been made to attract private capital through incentives: subsidies, guarantees or blended finance (a mix of public and private capital). But the bolder strategy - proactive steering through clear standards, restrictions and bans on harmful financing - remains underused.

Without it, sustainable financing continues to underperform. Worse, it runs the risk of being misused for greenwashing portfolios, while the destructive core of the economy remains untouched. Financing sustainability means little if unsustainable financing remains unchallenged. Instead of capital allocation, sustainable finance will be nothing more than a marketing tool.

We need a policy shift: not just to develop better sustainable products, but above all to diminish the appetite for unsustainable ones. A government serious about sustainability must tilt the playing field, making sustainable finance virtuous and viable, and harmful finance increasingly untenable.

Sustainable finance is a tool, not an end. And tools require direction. If we are to wield this one effectively, we must first decide: what kind of economy do we want to finance?

This is a translation of Hans Stegeman's column in Het Financieele Dagblad, published 17 June 2025.