The impact of the European Union’s sustainable finance
framework
Competitiveness implications and the European Union’s global position
International Business
Bachelor’s thesis
Author:
Helen Höijer
Supervisor:
D. Sc. Henna Leino
26.11.2025
Turku
Student’s statement regarding the use of Artificial Intelligence (AI) for preparing and/or writing this thesis:
☐ I have not used any AI-based tools.
☒ I have used AI-based tools. Their use is documented in the Appendix. The AI tools were used in a way
that complies with academic integrity guidelines.
The originality of this thesis has been checked in accordance with the University of Turku quality assurance
system using the Turnitin Originality Check service.
Bachelor's thesis
Subject: International Business
Author: Helen Höijer
Title: The impact of the European Union’s sustainable finance framework – competitiveness implications
and the European Union’s global position
Supervisor: D.Sc. Henna Leino
Number of pages: 53 (+ appendices 1 page)
Date: 26.11.2025
Abstract
This bachelor’s thesis examines how the European Union’s (EU) sustainable finance framework influences
the competitiveness of EU firms and the EU’s global position. The study's background relates to the rising
sustainability requirements in the global economy and the increasing pressure on financial markets to support
the transition toward climate neutrality. As environmental and social risks have become more visible,
policymakers have recognized that private capital plays a critical role in achieving long-term climate and
sustainability objectives. In response, the EU has developed a comprehensive sustainable finance framework
designed to redirect investment flows, improve transparency and reduce greenwashing.
The thesis analyses the main components of the framework: the EU Taxonomy, the Sustainable Finance
Disclosure Regulation (SFDR), and the Corporate Sustainability Reporting Directive (CSRD), as well as the
EU’s broader sustainable finance strategy. It explores both short- and long-term impacts, focusing on
immediate effects, long-term competitiveness implications and key implementation challenges. The analysis
draws on existing academic literature, policy reports and institutional documents.
The findings indicate that in the short term, the framework imposes substantial reporting requirements and
administrative burdens, particularly for small and medium-sized enterprises, which may temporarily weaken
competitiveness. Simultaneously, increased transparency and clearer definitions are beginning to strengthen
investor confidence and reduce greenwashing risks. In the long term, the framework has the potential to
support innovation, enhance market credibility and improve capital allocation, given that simplification
efforts and complementary financial reforms advance.
The study concludes that the EU’s sustainable finance framework creates both challenges and opportunities.
While the initial adjustment period is demanding, the long-term benefits may contribute to a more
transparent, sustainable and competitive financial environment. Future research should examine firm-level
effects, sectoral differences and the practical functioning of key regulatory instruments as implementation
continues to evolve.
Keywords: EU, sustainable finance, competitiveness, regulatory framework, green transition
Kandidaatintutkielma
Oppiaine: Kansainvälinen liiketoiminta
Tekijä: Helen Höijer
Otsikko: Euroopan unionin kestävän rahoituksen kehikon vaikutus – seuraukset Euroopan Unionin
kilpailukykyyn ja globaaliin asemaan
Ohjaaja: KTT Henna Leino
Sivumäärä: 53 (+ liitteet 1 sivu)
Päivämäärä: 26.11.2025
Tiivistelmä
Tämä kandidaatintutkielma tarkastelee, miten Euroopan unionin kestävän rahoituksen sääntelykehikko
vaikuttaa EU-yritysten kilpailukykyyn ja globaaliin asemaan. Tutkimusaiheen taustalla ovat globaalisti
kiristyvät kestävyyden vaatimukset sekä finanssimarkkinoiden kasvava paine tukea siirtymää kohti
ilmastoneutraaliutta. Kun ympäristöön ja yhteiskuntaan liittyvät riskit ovat tulleet yhä näkyvämmiksi, päättäjät
ovat tunnistaneet yksityisen pääoman keskeisen roolin pitkän aikavälin ilmasto- ja kestävyystavoitteiden
saavuttamisessa. Tämän seurauksena EU on kehittänyt laajan kestävän rahoituksen kehikon, jonka tavoitteena
on ohjata sijoitusvirtoja kestäviin kohteisiin, lisätä läpinäkyvyyttä ja vähentää viherpesun riskiä.
Tutkielma analysoi sääntelykehikon keskeisiä osia: EU-taksonomiaa, kestävyyteen liittyvien tietojen
julkistamista koskevaa asetusta (SFDR) ja kestävyysraportointidirektiiviä (CSRD), sekä laajempaa EU:n
kestävän rahoituksen strategiaa. Tutkielma tarkastelee sekä lyhyen että pitkän aikavälin vaikutuksia, keskittyen
sääntelyn välittömiin seurauksiin, pitkän aikavälin kilpailukykyvaikutuksiin ja keskeisiin
toimeenpanohaasteisiin. Analyysi perustuu aiempaan tutkimuskirjallisuuteen, politiikkaraportteihin ja
institutionaalisiin lähteisiin.
Tutkimuksen mukaan sääntely aiheuttaa lyhyellä aikavälillä huomattavia raportointivaatimuksia ja
hallinnollista taakkaa, erityisesti pienille ja keskisuurille yrityksille, mikä voi väliaikaisesti heikentää
kilpailukykyä. Kuitenkin samaan aikaan lisääntynyt läpinäkyvyys ja täsmällisemmät määritelmät alkavat
vahvistaa sijoittajien luottamusta ja vähentää viherpesun riskiä. Pitkällä aikavälillä sääntelykehikko voi edistää
innovaatioita, parantaa markkinoiden uskottavuutta ja tehostaa pääoman kohdentumista, mikäli sääntelyn
yksinkertaistaminen ja täydentävät rahoitusjärjestelmän uudistukset menevät eteenpäin.
Tutkielma osoittaa, että EU:n kestävän rahoituksen kehikko muodostaa sekä haasteita että mahdollisuuksia.
Vaikka alkuvaiheen sopeutuminen on vaativaa, pitkän aikavälin hyödyt voivat tukea läpinäkyvämpää,
kestävämpää ja kilpailukykyisempää rahoitusympäristöä. Jatkossa tutkimusta tulisi suunnata yritystasolle,
toimialakohtaisiin eroihin sekä keskeisten sääntelyinstrumenttien käytännön toimivuuteen niiden
toimeenpanon kehittyessä.
Avainsanat: EU, kestävä rahoitus, kilpailukyky, sääntelykehys, vihreä siirtymä
TABLE OF CONTENTS
1 Introduction 9
1.1 Background 9
1.2 Aim of the thesis 11
2 Mechanisms shaping the effectiveness of the EU’s sustainable finance
framework 13
2.1 Institutional influence 13
2.2 Regulatory influence 15
2.2.1 Regulatory Competition 15
2.2.2 Regulatory spillovers and the Brussels Effect 16
2.3 Financial influence and competitiveness 17
2.3.1 Sustainable and transition finance 17
2.3.2 Competitiveness theory 18
2.4 Summary of the mechanisms 20
3 EU’s sustainable finance framework 22
3.1 EU’s strategy for the transition to a sustainable economy 22
3.2 The EU Taxonomy and DNSH principle 23
3.3 The Sustainable Finance Disclosure Regulation (SFDR) 24
3.4 The Corporate Sustainability Reporting Directive (CSRD) and ESRS 25
3.5 Summary of the EU’s sustainable finance framework 26
4 Impact of the EU’s sustainable finance framework on competitiveness 28
4.1 Short-term impacts 28
4.1.1 Emerging shifts in investment flows 28
4.1.2 Firm-level consequences 30
4.1.3 Regulatory complexity and uncertainty 32
4.1.4 Political reactions 33
4.2 Long-term impacts 34
4.2.1 Innovation and productivity effects 34
4.2.2 Global positioning and spillovers 36
4.2.3 Political trajectory and institutional stability 37
4.3 The connection between practical and theoretical implications 39
5 Conclusion 44
References 47
Appendix 54
FIGURES
Figure 1 The ESG factors (Harvard Extension School 2023) 18
Figure 2 The theoretical influence of the EU’s sustainable finance framework on its global
competitiveness 20
Figure 3 The structure and interconnections of the EU sustainable finance framework 26
Figure 4 The practical and theoretical implications of the EU’s sustainable finance
framework 42
9
1 Introduction
1.1 Background
Since its founding, the European Union (EU) has combined economic integration with a broader
mission of promoting peace, prosperity, and sustainable development. Over the past two decades,
this mission has increasingly focused on environmental protection and climate action. The
European Green Deal, launched in 2019, is the EU’s main strategy for achieving climate neutrality
by 2050 (European Council 2025). At the same time, the EU has increasingly linked its
sustainability ambitions to a broader strategic objective: boosting Europe’s global competitiveness
and long-term economic growth. The current European Commission has emphasised that climate
neutrality, economic resilience and green innovation must proceed together if the EU is to remain
competitive vis-à-vis the United States, China, and emerging economies (European Commission
2025-a; Draghi 2024, 13).
This ambitious goal, however, will not be achieved without significant investments. According to
the European Environment Agency (EEA 2023), the European Green Deal will require an
additional EUR 520 billion annually from 2021 to 2030. The European Central Bank (ECB 2024)
estimates that the combined green and digital transition requires total annual investments of around
EUR 1,241 billion until 2030 and beyond. To achieve these objectives, the EU has sought to align
financial markets with sustainability objectives, recognising that public funding alone cannot meet
the investment needs (European Commission n.d.-a). Redirecting private capital, however, requires
a significant shift in how the financial system functions. This challenge demonstrates the scope and
ambition of the European Green Deal, which the European Commission’s President Ursula von der
Leyen described as “Europe’s man on the moon moment” (Bongardt & Torres 2022, 170).
The EU’s approach to sustainability has made it a frontrunner in sustainable finance (O’Callaghan-
White & Sofia 2024, 13; AFME 2025, 1). Three instruments are at the core of its regulatory
framework: the EU Taxonomy for Sustainable Activities, the Sustainable Finance Disclosure
Regulation (SFDR), and the Corporate Sustainability Reporting Directive (CSRD) (PSF 2025-a,
10). The Taxonomy provides the classification system for defining what counts as environmentally
sustainable economic activity. The SFDR and CSRD complement the EU Taxonomy in different
ways: the SFDR imposes sustainability-related disclosure obligations on financial institutions and
investment products, whereas the CSRD requires companies to report detailed sustainability
information (Vandeloise & Grandjean 2024; Mertens & van der Zwan 2025, 5). These measures are
10
designed to direct capital towards sustainable projects, improve transparency in financial markets,
and reduce greenwashing (Mezzanotte 2022, 218; European Commission n.d-a). In practice, they
represent one of the most ambitious attempts worldwide to utilize regulation in reshaping financial
systems (AFME 2025, 1).
The framework, however, has sparked debate about its economic effects. On the one hand, it may
create long-term benefits by strengthening investor trust, making sustainability data more
comparable, and positioning the EU as a global standard. On the other hand, it also adds reporting
requirements and compliance costs that may put European firms at a disadvantage compared to
competitors outside the EU (Merler 2025, 5–7; Brabec & Macháč 2025, 6–8). This tension raises
the key question of whether the framework ultimately strengthens or weakens the competitiveness
of EU-based firms and capital markets in a globalized financial environment.
Previous research has examined various aspects of the framework. Brabec and Macháč (2025) show
that the Taxonomy implementation increases administrative costs but also improves transparency.
Merler (2025) highlights the ambitious scope of the framework but notes that its complexity and
vague definitions can compromise its effectiveness. Mezzanotte (2023) highlights the practical
difficulties and technical complexity that firms face when applying the Taxonomy criteria due to
limited data availability. These studies help to illustrate the trade-offs of the regulation, but most
research so far has focused mainly on compliance and policy design. Less attention has been given
to the broader impact on cross-border investment flows and on the EU’s competitive position in
global markets. This gap is where this thesis aims to make its contribution.
The relevance of this study is emphasised by the political shift currently taking place in the EU. The
sustainable finance framework was originally developed during a period of strong environmental
ambition, when the Commission and Parliament sought to rapidly expand climate and sustainability
regulation (Calipha et al. 2025, 22–23). In the current political cycle, however, the EU has
increasingly emphasised regulatory simplification, administrative relief, and competitiveness
concerns (European Commission 2025-b; CCEEL 2025). On the 13th of November 2025, the
European Parliament voted in favour of a simplification initiative to substantially reduce
sustainability reporting and due diligence requirements (News European Parliament 2025). This has
divided options among the Members of the Parliament (MEP) and experts, as many argue that the
simplification prioritises competitiveness at the expense of the original sustainability ambition
(Pietikäinen 2025; Hautala 2025). This illustrates how the regulatory direction is now being
reassessed in real time.
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1.2 Aim of the thesis
The aim of this bachelor’s thesis is to explore how the EU’s sustainable finance framework affects
EU firms' competitiveness and its global influence. The main research question is: How does the
European Union’s sustainable finance framework influence its competitiveness and global position?
This question is examined through three sub-questions:
• Through what institutional, regulatory, and financial mechanisms do sustainable finance
frameworks influence the allocation of capital and the behaviour of financial actors?
• What is the EU’s strategy for a sustainable economy, and what are the primary instruments
in its sustainable finance framework?
• In what ways does the EU’s sustainability finance framework influence firms’
competitiveness and investment flows in the short and long term?
The selection of institutional, regulatory, and financial mechanisms as theoretical lenses to this
thesis is grounded in the established literature on sustainable finance and firm behaviour.
Institutional theory is essential because the EU’s framework functions as a formal institutional
intervention that restructures the incentives, expectations and norms of the financial markets (North
1990, 3–5). In turn, regulatory literature highlights how economic regions aim to attract investments
and business activity by a favourable regulatory environment (Vogel 1995, 5–6). It also examines
how regulatory frameworks, such as the EU’s sustainable finance framework, expand their global
presence (Bradford 2025, 25–65). Lastly, financial mechanisms draw from sustainable finance
theory, which assesses how sustainability factors influence investor decisions and redirect capital
flows (Schoenmaker 2019, 8–12). This is closely connected to the competitiveness theory, which
focuses on sustainable finance’s impact on innovation, productivity and a firm’s strategy
(Schoenmaker & Schramade 2019, 28–29). Therefore, it helps evaluate how sustainability and a
stringent regulatory framework can be leveraged to create a competitive advantage (Porter 2008, 7–
9; Ambec et al. 2010, 2–7). Together, these mechanisms offer a comprehensive theoretical
framework to analyse how the EU’s sustainable finance framework influences market dynamics.
This thesis focuses on three central instruments of the EU’s sustainable finance framework: the EU
Taxonomy, the SFDR, and the CSRD. While the broader field of sustainable finance includes other
policies and voluntary standards, these three instruments represent the foundation of the EU’s
regulatory approach (PSF 2025-a, 10). They directly influence the flow of sustainability information
12
across financial market, making them essential instruments for analyzing the EU’s sustainable finance
framework’s influence. This thesis also focuses on how these pieces of legislation support the EU’s
strategies for a sustainable and competitive economy, the European Green Deal and the renewed
sustainable finance strategy. The focus is primarily on these two strategic approaches because they
mainly define the political and regulatory rationale behind the EU’s sustainable finance framework.
They also provide an analytical foundation for assessing how effectively the framework reaches it
goals.
Key concepts in this thesis include sustainable finance, meaning the integration of environmental
and social considerations into financial decision-making; competitiveness, understood as the ability
of firms and markets to attract investment and perform efficiently compared to global peers; and
green transition, referring to the economic and societal shift from carbon-intensive systems to
environmentally sustainable ones.
The structure of the thesis is as follows: Chapter 2 introduces the theoretical framework, drawing
from institutional theory, regulatory competition, and sustainable finance literature. Chapter 3
outlines the EU’s main strategy for a sustainable economy and its sustainable finance framework,
focusing on the European Green Deal, the renewed sustainable finance strategy, the Taxonomy, the
SFDR, and the CSRD. Chapter 4 examines how these measures impact firms and investors in both
the short and long term, combining the practical and theoretical implications. The chapter also
examines the EU’s approach in a global setting, comparing it with other major economies and
considering its competitive position in world markets. Finally, Chapter 5 summarizes the findings,
discusses contributions, acknowledges limitations, and suggests directions for further research.
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2 Mechanisms shaping the effectiveness of the EU’s sustainable
finance framework
Understanding the way the EU’s sustainable finance framework influences requires a
multidimensional theoretical lens. This chapter, therefore, draws on three complementary
perspectives: institutional, regulatory, and financial mechanisms. Each of these is rooted in
established research and theories that explain how rules, norms, and incentives shape economic
behaviour. First, institutional theory (North 1990) provides the foundation for analysing how formal
rules and informal expectations structure incentives for firms and investors. Because the EU’s
sustainable finance framework operates as a layer of institutional constraints and opportunities,
institutional theory helps explain why organisations respond differently to sustainability pressures
and how these responses influence the framework’s overall effectiveness.
Second, regulatory competition and global governance literature (Vogel 1995; Bradford 2020) offer
tools for analysing how regulatory choices shape market dynamics within and beyond the EU’s
borders. EU legislation interacts with other jurisdictions, produces spillovers, and competes with
alternative regulatory frameworks. Regulatory theory thus clarifies how the design and stringency
of the EU legislation turns into competitive advantages or disadvantages for firms, investors and
capital markets. Lastly, sustainable finance (Schoenmaker 2019) provides insights into how market
actors integrate sustainability information into investment decisions. Because the EU’s sustainable
finance framework primarily seeks to steer capital flows, sustainable finance theory is essential for
understanding how it influences capital allocation. The theory emphasises that shifts in capital
allocation and investor behaviour directly affect firms’ operating environment, making them
competitive factors. By integrating competitiveness theory (Porter 2008) into the analysis of
financial mechanisms, this chapter examines how changes in the economic environments translate
into strategic advantages or disadvantages for firms and economic regions.
2.1 Institutional influence
Institutions provide the “rules of the game” that guide and limit human and organizational
behaviour (North 1990, 3). They comprise both formal structures, such as regulatory frameworks,
and informal ones, including cultural norms and societal expectations (North 1990, 4–5). Together,
these institutional elements shape incentives, reduce uncertainty and make coordinated economic
activity possible. Without such structures, financial exchanges would become costly and risky, as
market participants would need to repeatedly negotiate and enforce agreements (North 1990, 27–
14
31). From an institutional perspective, the EU’s sustainable finance framework operates as a formal
institutional arrangement: it defines the rules that govern market behaviour, shape incentives and
coordinate expectations across markets. At the same time, it reflects broader societal expectations
regarding environmental responsibility and transparency.
Institutional development tends to be gradual, as existing financial and reporting rules limit the
introduction of new requirements. New sustainability rules are added as layers to existing
frameworks rather than replacing them entirely (North 1990, 92–95). This helps explain why the
EU’s sustainable finance framework takes the form of additions to existing financial regulation
rather than a radical new system. This pattern is reinforced by the EU’s own decision-making
structure: legislation requires agreement among the Commission, the European Parliament, and the
27 member states in the Council (European Union n.d.). This makes far-reaching institutional
reforms difficult and slow to evolve.
In their research, Galleli and Amaral (2024, 18–19) demonstrate that organizations respond to
institutional pressures in various ways. The writers discovered that environmental and social
expectations lead to either surface-level adaptation or deep institutional change, depending on how
they are translated into practice. The first types of organizations adapt their practices to meet
external demands, demonstrating compliance but not necessarily reflecting deep organisational
change. The second type of organizations may use narratives to demonstrate alignment with
sustainability norms, even when their practices lag behind. This legitimacy-seeking behaviour is
known as greenwashing (UN n.d.-a). Thirdly, organizations may transform their operations
holistically by integrating sustainability into the core strategy and business model.
Galleli & Amaral (2024, 22–23) emphasize that these different responses produce mixed outcomes.
Legitimacy is the most common result for the first type of organizations, as by signalling
conformity, they gain stakeholder trust. For the second type of organizations, decoupling is the
common result. This refers to symbolic compliance, which leaves a gap between stated
commitments and actual practice. Lastly, the most responsible organizations that integrate
sustainability into their core operations, may achieve improved performance. Galleli & Amaral
(2024, 23) state that these types of organisations benefit from financial advantages such as lower
equity financing costs and stronger brand equity. Sustainability integration also fosters innovation
and business model evolution. This demonstrates that institutional pressures, like the EU’s
framework, can also foster innovation and long-term competitiveness
15
However, institutional research suggests that new regulatory or organizational practices rarely
become embedded without initial uncertainty, adaptation costs and behavioural frictions. As Chiu
(2018, 301;330) suggests, at first, institutional interventions operate as coercive pressures that
disrupt established routines and impose new procedural and informational requirements. This often
generates short-term inefficiencies before stabilising into accepted practices. The findings of Palazzi
et al. (2025, 1056–1057) empirically confirm this pattern. In their case study, the authors show that
high coordination demands, data integration challenges and procedural uncertainty characterise the
early stages of adoption. Over time, however, these frictions diminished as the system became more
widely used and aligned with organisational routines (Palazzi et al. 2025, 1066;1071). This
highlights that new rules produce short-term constraints, but through consistent use and
internalisation, they may enable longer-term organizational benefits and increased legitimacy.
2.2 Regulatory influence
2.2.1 Regulatory Competition
Regulatory competition refers to the process by which jurisdictions adjust their rules and standards
in response to the regulatory choices made by others. In financial markets, regulatory competition
creates a tension, where lighter regulation can attract firms by lowering compliance costs, but
stricter frameworks can strengthen credibility and investor trust. This interplay can take the form of
a “race to the bottom”, where lower regulatory burdens are adopted to attract capital. In contrast,
regulatory competition may also lead to a “race to the top,” in which higher standards are adopted
due to political, economic, or social incentives (Vogel 1995, 5–6). The EU’s sustainable finance
framework illustrates this trade-off. By introducing the Taxonomy, the SFDR, and the CSRD, the
EU presents significant reporting duties and data requirements. These obligations may increase
short-term costs, yet they are also intended to make the EU market more attractive to investors who
value transparency and protection against greenwashing (Meller 2025, 5–7). This illustrates the
“race to the top” scenario.
The desire to build an efficient and coherent single market is one of the primary drivers behind EU
regulation. The European Commission (2025-c) notes that the single market is the main driver of its
competitiveness, and it seeks to strengthen it further strategically. Hence, one of the EU’s core
priorities is to enforce harmonized regulatory standards within its borders. Regulatory
harmonization refers to the process of aligning national standards, laws, and practices across
jurisdictions to create consistency and reduce barriers (Vogel 1995, 189; Martino 2023, 13). In the
EU’s economic context, the aim is to enhance the mobility of citizens and businesses, enforce social
16
entrepreneurship and strengthen consumer confidence (EUR-Lex 2012). However, Burton (2019,
709–710) and Bradford (2020, 10) note that the EU’s member states are sovereign countries with
their own legal and regulatory systems. This heterogeneity creates tensions between national and
EU-level preferences and contributes to internal regulatory competition, as member states balance
domestic interests with the requirements of the EU-wide harmonisation.
2.2.2 Regulatory spillovers and the Brussels Effect
Regulatory spillovers extend the EU’s institutional influence beyond its borders. These arise when
regulatory actions in one jurisdiction affect the behavior in another, a phenomenon that is
increasingly common in our interconnected world. The transfer channels for spillovers are
numerous, for instance, through financial flows, the import and export of goods and services,
migration, and knowledge transfers. In addition, countries’ policies necessarily influence one
another (OECD 2021, 23). For example, asset managers from the U.S. or China who market funds
in Europe must comply with the EU’s disclosure rules, even if their home jurisdictions have no
comparable requirements (Bradford 2020, 28–29).
Studies from Agénor et al. (2024) and the European Investment Bank (EIB 2024-a) highlight the
dual nature of spillovers. On the one hand, they can advance stability, innovation, and knowledge
transfer. For example, EIB (2024-a, 21–22) emphasizes the role the EU has in promoting the
adoption of climate-friendly practices beyond its borders, particularly in regions with low
engagement or high spillover potential. On the other hand, however, regulatory differences can be
exploited. When one regulator tightens capital or disclosure rules, firms and investors may respond
by moving activities to other, less stringent, jurisdictions (Agénor et al. 2022, 12–14).
A central term related to regulation spillovers is the “Brussels Effect”, coined by Amu Bradford
(2020). This term refers to the way the EU spreads its regulations across borders, intentionally or
not (Bradford, 2020, 3–5). The EU is a major player in the global market: in 2023, it accounted for
14.7% of global GDP, ranking third after China and the United States (Eurostat 2025, 38). As it is
one of the largest economies in the world, the financial markets, global investors, and non-EU firms
are under pressure to adopt similar regulatory standards to remain compliant with its rules (Bradford
2020, 26–30). However, market size alone is insufficient to set global standards. The EU has
become a global regulator by building institutions that translate its market power into regulatory
impact. The EU policymakers and key stakeholders have further supported stringent rules as part of
the EU’s broader mission, giving political legitimacy to ambitious regulation (Bradford 2020, 25).
In addition, the EU intentionally promotes its regulations globally to protect the competitiveness of
17
European firms by ensuring equal standards. This enhances its legitimacy and soft power through
global acceptance of its norms. In addition, the EU seeks to intentionally extend its governance
model to fill the regulatory gap left by the declining influence of the U.S. and the weakening of
international institutions, such as the WTO (Bradford 2020, 23–24).
2.3 Financial influence and competitiveness
2.3.1 Sustainable and transition finance
As climate change and resource depletion increasingly threaten societies, public policy must rapidly
adapt to this new reality. As discussed in the introduction, the financial sector plays a crucial role in
directing capital toward environmentally responsible activities (Harvard Extension School, 2023).
In traditional finance theory, efficient markets are expected to allocate funds to projects with the
highest risk-adjusted returns, thereby promoting growth and competitiveness (Kamoune &
Ibenrissoul 2022, 284–285). Sustainable finance builds on this logic by considering ESG factors
when making investment decisions (see Figure 1) (European Commission n.d.-a). Instead of
evaluating only financial risk and return, capital is assessed by its impact on long-term
sustainability outcomes (Schoenmaker 2019, 3). According to Schoenmaker (2019, 2–3),
sustainable finance is fundamentally about managing the trade-offs between financial
performance, social impact, and environmental protection. The author emphasizes that for the
development of more advanced forms of sustainable finance, the availability of comparable and
reliable sustainability data is crucial. It provides the information needed for integrated sustainability
decision-making and allows investors to evaluate firms’ total societal impact (Schoenmaker 2019,
9;22).
18
Figure 1 The ESG factors (Harvard Extension School 2023)
One essential component of sustainable finance is transition finance. Rather than funding only
activities that are already sustainable, transition finance facilitates investment in industries seeking
to improve their environmental performance. These may include projects in high-emission sectors
that aim to minimize their environmental footprint where fully green technologies are not yet
available (European Commission n.d.-a). This approach recognizes the diversity of starting points
among companies and encourages gradual pathways toward sustainability.
European Commission (n.d.-a) highlights that transition finance is crucial for achieving the Green
Deal’s sustainability objectives. Therefore, the European Commission published non-binding
guidelines in 2023 that encourage both financial and non-financial companies to voluntarily use EU
sustainable finance tools to support transition finance (PSF 2025-b, 8). Caldecott (2020, 936–937)
builds on this by highlighting that transition finance should apply to all counterparties, including
firms, governments, individuals, and state-owned enterprises. He additionally argues that transition
finance should not be limited to green investment but also include social objectives that enable
progressive sustainability improvements across sectors, in line with the UN Sustainable
Development Goals (SDGs).
2.3.2 Competitiveness theory
Competitiveness theory, as developed by Michael Porter, provides a framework for understanding
how firms, industries, and nations achieve and sustain competitive advantage in the global
19
economy. Competitiveness theory emphasizes that lasting competitiveness does not only come from
cost advantages or market power, but from the capacity to innovate and continuously improve
products and business models (Porter 2008, 7–9). In Porter’s early work, competition was viewed as
a dynamic process through which firms seek to create and capture value more effectively than their
rivals. However, Porter later expanded this view to stress value creation for all stakeholders, not just
shareholders. This shift marks an evolution from zero-sum competition toward a positive-sum
model, where firms can achieve success by simultaneously advancing both economic and social
outcomes (Dong-sung 2013, 65–69). Therefore, the concept of shared value creation lies at the heart
of competitiveness.
Porter & Kramer (2006, 2–3) further emphasise that corporate social responsibility (CSR) should
not be regarded as a burden, but as a source of opportunity and growth. They note that business and
society are mutually dependent, and that long-term success requires integrating social and
environmental concerns directly into core business strategy. This is also highlighted by
Tarnovskaya (2023, 79–83), who adds that, to turn sustainability into a competitive advantage,
firms should build capabilities around it, focusing on how their sustainable practices create
customer value, generate cost savings through resource efficiency, and enable new business models.
Tarnovskaya, however, notes that firms may use sustainability to win competitors, position their
brands, and gain market share, without embedding it in their core values. She emphasizes the
importance of firms to cooperate rather than compete and create innovational ways to generate
sustainable value. This way, firms can generate real value that has the power to solve environmental
and social issues (Tarnovskaya 2023, 87).
The Porter Hypothesis (PH), introduced by Michael Porter (1991), further supports the concept of
sustainability as a source of competitive advantage. This hypothesis argues that well-designed and
stringent environmental policies can stimulate innovation, increase efficiency, and ultimately
enhance competitiveness (Ambec et al. 2013, 3). Ambec et al. (2013, 4–5) explain that the central
claim of the PH is that regulation can create “innovation offsets”, which refers to efficiency
improvements and cost reductions that partially or fully compensate for the cost of compliance.
These offsets arise because environmental regulations prompt firms to adopt new technologies and
redesign processes. In other words, environmental constraints can act as drivers of innovation,
particularly when firms are otherwise slow to recognize profitable sustainability opportunities. This
view is also supported by more recent research, which suggests that competitiveness increasingly
depends on firms’ ability to generate positive and minimise negative externalities (Fatma & Haleem
2023, 6; Galván-Vela et al. 2023, 5; Alyahya & Agag 2025, 2).
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The PH also provides a conceptual foundation for sustainable finance. If environmental regulation
can create innovation opportunities and competitive advantages, financial systems play a critical
role in funding them. Sustainable finance enables firms to access the capital necessary to invest in
green technologies and innovation that align with regulatory standards. In addition, Dong-sung
(2013, 80–82) highlights the central role that governments play in enabling sustainability to become
a driver of competitiveness. He notes that governments and unions should not solely control
markets but create the conditions that stimulate innovation and investment.
2.4 Summary of the mechanisms
This chapter has identified three core influence mechanisms–institutional, regulatory, and financial–
and examines how each contributes to the framework's overall functioning and effectiveness. Taken
together, they form an interdependent theoretical foundation for analysing how the EU’s sustainable
finance framework influences firms, investors, and capital markets. Figure 2 brings together the key
concepts and theories discussed and visualises how they together shape the EU’s global
competitiveness.
Figure 2 The theoretical influence of the EU’s sustainable finance framework on its global
competitiveness
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The framework in the figure aims to highlight that the framework effects do not emerge from
individual regulatory instruments by themselves, but from combined interactions. This framework
will serve as a guiding analytical tool for the remainder of this thesis. In the analysis section, each
finding will be interpreted through these mechanisms to assess the EU’s sustainability finance
framework’s competitive implications. Some elements discussed in this chapter are intentionally
left out of the framework to maintain conceptual clarity. For example, the initial inefficiencies of
institutional change and the explanation of ESG factors support the main mechanism but do not
function as a distinct theoretical component behind the EU’s global competitive position.
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3 EU’s sustainable finance framework
3.1 EU’s strategy for the transition to a sustainable economy
The European Commission (n.d.-b) emphasizes that “climate change is a global threat and can only
be addressed through a global response”. This is why the EU actively engages in climate action via
international forums, particularly through the United Nations (UN) 2030 Agenda for Sustainable
Development and the UN Framework Convention on Climate Change (UNFCCC). The 2030
Agenda, adopted by the UN General Assembly in 2015, established a universal framework built
around 17 Sustainable Development Goals (SDGs). These goals integrate the economic, social, and
environmental dimensions of sustainability (UN n.d.-b). The Council of the EU reaffirmed in 2017
that the EU and its member states are committed to applying the 2030 Agenda in close collaboration
with international partners (Calipha et al. 2025, 19–20). Hence, the EU sustainable finance
framework is explicitly aligned with the UN SDGs (Jenei et al. 2024, 14–16).
The most notable tool of the UNFCCC processes is the Paris Agreement, a legally-binding, global
agreement against climate change. It was adopted in 2015 by 195 UN member states at the UN
Climate Change Conference (COP21) in Paris, France. Its central goal is to limit the increase in
global average temperature to well below 2°C, ideally to 1.5°C above pre-industrial levels.
Importantly, the agreement aims to align financial markets to be consistent with low greenhouse gas
emissions and climate-resilient development (UNFCCC n.d.). The EU approved the Agreement in
2016, integrating it into its broader climate and energy framework (Calipha et al, 2025, 19–20).
Therefore, the EU’s strategy is guided by the goals of the Paris Agreement (Fetting 2020, 6).
As discussed in the Introduction, the European Green Deal is the EU’s overarching policy
framework for achieving a climate-neutral and competitive economy. It was launched by President
von der Leyen in 2019, with the aim of reducing greenhouse gas emissions by at least 55% by 2030
compared to 1990 levels, and to achieve climate neutrality by 2050. This would most likely make
Europe the first climate-neutral continent (European Parliament n.d-b). The European Council
(2025) highlights that to achieve this goal, emissions must be reduced across sectors, including
industry, energy, transport and farming. Smol (2022, 6–7) thus emphasizes that the Green Deal’s
strength lies in its systemic vision: it mobilises various sectors of society, from industry and
research to education and policy, toward a climate-neutral and resource-efficient economy.
In response to evolving needs, the Commission introduced the renewed sustainable finance
strategy in 2021, marking a new phase in the EU’s sustainable finance agenda (Calipha et al 2025,
23
27). The goal of the renewed strategy is to contribute to the EU’s recovery from the COVID-19
pandemic and the objectives of the European Green Deal. It specifically aims to create an enabling
framework that reinforces sustainable investments and increasingly includes small and medium-
sized enterprises (SMEs) (European Commission, 2021). It focuses on four priority areas: transition
finance, inclusiveness, resilience, and the financial system's contribution, as well as global ambition
(European Parliament, 2025). In other words, its main agenda is to strengthen the EU’s global
position and competitiveness while contributing to climate neutrality.
3.2 The EU Taxonomy and DNSH principle
The EU Taxonomy Regulation (Regulation 2020/852/EU) is considered the cornerstone of the EU’s
sustainable finance framework (PSF 2025-a, 10). It entered into force in 2020 and establishes a
classification system that defines which economic activities can be considered environmentally
sustainable. The primary purpose of the Taxonomy is to create a common language for investors,
companies, and policymakers, enabling financial flows to be directed toward activities that
genuinely contribute to environmental objectives (European Commission n.d-c). It also acts as an
essential tool against greenwashing by setting clear criteria for environmental sustainability
(Calipha et al 2025, 33).
The regulation sets out six environmental objectives (European Commission n.d-c):
1. Climate change mitigation
2. Climate change adaptation
3. Sustainable use and protection of water and marine resources
4. Transition to a circular economy
5. Pollution prevention and control
6. Protection and restoration of biodiversity and ecosystems
To qualify as sustainable, an economic activity must (1) substantially contribute to at least one of
these objectives, (2) do no significant harm to the others (the DNSH principle), and (3) comply with
minimum safeguards related to labour and human rights, and (4) comply with technical screening
criteria (EUR-Lex 2021).
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The DNSH principle, outlined in Article 17 of the Regulation, serves as a cross-checking
mechanism to ensure that an activity advancing one environmental goal does not harm another
(ESMA 2023, 2). In practice, this means that a renewable energy project that reduces emissions
cannot, for example, destroy natural habitats or pollute water sources. Zetzsche et al. (2022, 663–
664) describe DNSH as a mechanism that ensures the credibility of sustainability classifications
by preventing trade-offs between environmental objectives. Besides the Taxonomy, it also operates
across other EU laws, for instance, the SFDR and the Benchmarks Regulation (BMR) (ESMA
2023, 1–2).
Zetzsche et al. (2022, 664) emphasise that the EU Taxonomy translates broad environmental goals
into clear, detailed rules across various sectors. These technical screening criteria, which span
hundreds of pages, specify precisely what constitutes a sustainable activity. The authors describe
the Taxonomy as a precise and advanced system, more detailed than international ESG standards
(Zetzsche et al. 2022, 677).
3.3 The Sustainable Finance Disclosure Regulation (SFDR)
The Sustainable Finance Disclosure Regulation (SFDR, Regulation (2019/2088/EU) is the second
key element of the EU’s sustainable finance framework. It was established in 2019 and came into
effect in 2021. It complements the EU Taxonomy by requiring financial institutions to explain how
they disclose sustainability information (Calipha et al. 2025, 36). The regulation does not directly
require investors to apply environmental criteria in their decisions. Instead, it requires financial
actors who market products as sustainable to justify their claims and disclose relevant information.
Hence, the SFDR’s main goal is to increase transparency and enable investors to make well-
informed decisions (European Commission n.d.-d). The SFDR classifies financial products into
three categories: Article 6 (non-sustainable), Article 8 (“light-green”) and Article 9 (“dark-green”).
Article 9 funds pursue explicit sustainability objectives, whereas Article 8 funds promote objectives
with positive environmental or social qualities. Ideally, Article 9 funds should invest heavily in
taxonomy-aligned activities (Abouarab et al. 2025, 983). However, the SFDR does not define
sustainability in the exact same way as the Taxonomy. For instance, it widens the Taxonomy’s
definition by including both environmental and social objectives (EUR-lex 2019).
A key concept in the SFDR is double materiality. It requires institutions to disclose how
sustainability risks affect financial performance (“outside-in”) and how investment decisions affect
environmental and social outcomes (“inside-out”) (Calipha et al. 2025, 37). From an inside-
out perspective, firms must report how their investment decisions may negatively impact
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sustainability factors and how they plan to mitigate these impacts. From an outside-in perspective,
firms need to disclose how ESG risks could affect their financial returns and risk management
strategies (Calipha et al. 2025, 37). This two-way perspective ensures that investors understand the
economic implications of sustainability factors and the broader consequences of their financial
activities on ESG factors (Zetzsche et al. 2022, 663). The double materiality analysis is also
embedded in other EU reporting obligations, such as the CSRD (European Commission n.d.-d).
3.4 The Corporate Sustainability Reporting Directive (CSRD) and ESRS
The Corporate Sustainability Reporting Directive (CSRD, Directive 2022/2464/EU) is the newest
significant addition to the EU’s sustainable finance framework, adopted in late 2022 and becoming
effective from 2024 onwards (European Commission n.d-e). It replaces the earlier Non-Financial
Reporting Directive (NFRD) by setting more comprehensive and detailed requirements for
corporate sustainability reporting. Its purpose is to bring sustainability reporting closer to
the quality, comparability, and reliability of financial reporting (KPMG 2024). Hence, it introduces
the requirement for a mandatory third-party assurance of sustainability information, similar to the
audit of financial statements (Esgrid 2024). Through these acts, the CSRD helps investors identify
companies engaged in sustainable activities.
The CSRD requires companies above a certain size to report on what they consider to be social and
environmental risks and opportunities, as well as the effects their activities have on social and
environmental factors (European Commission n.d.-e). This aligns with the principle of double
materiality, making it a central concept of the CSRD. To make this operational, the European
Financial Reporting Advisory Group (EFRAG) created the European Sustainability Reporting
Standards (ESRS). These define what companies must report and how this information must be
presented, aiming to ensure consistency and comparability across member states. In particular, the
reporting emphasizes ESG factors such as climate change impacts, human rights, working
conditions, and governance practices (EFRAG 2025, 6–12).
The CSRD works closely together with the EU Taxonomy and the SFDR. The CSRD provides
comprehensive, standardised sustainability information that financial institutions rely on to meet
their disclosure obligations under the SFDR. This allows investors and asset managers to assess
how well their portfolios align with EU sustainability objectives. In addition, both the CSRD and
the SFDR are mostly grounded in the EU Taxonomy, which provides the common criteria for
identifying environmentally sustainable activities (Esgrid 2024). This shared foundation
ensures consistency and comparability across corporate and financial reporting.
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3.5 Summary of the EU’s sustainable finance framework
This chapter provides an overview of the EU’s sustainable finance framework’s core components –
the EU Taxonomy, the SFDR, and the CSRD – and how these work together to support the EU’s
broader strategy for a sustainable economy. Although these pieces of legislation share a common
goal, research suggests that the framework is considered complex and fragmented (Vandeloise &
Grandjean 2024). Therefore, it is crucial to understand the main objective of each component and
how they interconnect. Figure 3 aims to summarise this regulatory architecture by illustrating how
the three components collectively aim to operationalise the goals of the European Green Deal and
Renewed Sustainable Finance Strategy.
Figure 3 The structure and interconnections of the EU sustainable finance framework
The figure highlights the EU’s sustainability framework’s strategic foundation and how the EU
Taxonomy, the SFDR, and the CSRD operate as an integrated system rather than standalone
regulations and directives. The EU Taxonomy provides the definitional backbone by setting out
what counts as environmentally sustainable activity. Its technical screening criteria, including the
DNSH principle, support the consistent sustainability classification across sectors. The SFDR builds
on this by governing how financial market participants disclose sustainability risk and impacts.
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Importantly, it heavily depends on taxonomy-aligned data to substantiate claims about the
sustainability of financial products, particularly when it comes to Article 9 funds. Lastly, the CSRD
complements both regulations by harmonising corporate sustainability reporting based on the
ESRS. It requires companies to report detailed, double-materiality-based information, much of
which is essential for the SFDR disclosure obligations. In summary, the Taxonomy provides
definitions, the CSRD provides the underlying corporate data, and the SFDR transmits this
information to financial markets. Figure 3 works as an analytical map for Chapter 4, which explores
how the framework’s design and interplay influence transparency, market behaviour, and ultimately
the competitive position of the EU.
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4 Impact of the EU’s sustainable finance framework on
competitiveness
This chapter examines how the EU’s sustainable finance framework shapes its competitiveness and
global position, based on established research, economic reports and political statements. The
chapter presents the practical implications of the regulatory framework by distinguishing between
its short-term and long-term impacts. It explores the interconnected implications of the legislation
discussed in Chapter 3 (see Figure 3) and assesses how effectively these further the EU’s strategies
for a sustainable and competitive single market. The chapter also identifies the theoretical
implications of these findings by linking them back to institutional, regulatory, and financial
mechanisms discussed in Chapter 2. This provides an assessment of how the observed results
reinforce or challenge the theoretical assumptions introduced earlier in the thesis (see Figure 2).
Lastly, this chapter links together the theoretical foundation presented in Chapter 2 and the practical
findings, combining the analytical conclusions of this thesis.
4.1 Short-term impacts
4.1.1 Emerging shifts in investment flows
According to the European Commission Platform on Sustainable Finance’s (PSF 2025-c) report, the
short-term impacts of the EU’s sustainable finance framework are beginning to materialize. The
report uses the Taxonomy as the starting point, emphasizing its effectiveness for evaluating the
volume and allocation of sustainable investments. Among large, listed EU firms, taxonomy-aligned
capital expenditure (CapEx) reached EUR 250 billion in 2023, an increase of 34% from 2022. In
addition, the report identified around EUR 206 billion in transition-related investments that are not
yet fully taxonomy-aligned but support the transition (PSF 2025-c, 10). These figures suggest that
the framework has already begun to influence corporate investment patterns. However, the report
notes that the progress varies across sectors and member states (SPF 2025-c, 10).
The report (2025-c, 11) also emphasized the impact of debt-based financing instruments,
particularly green bonds and sustainability-linked loans. Green bonds are funding instruments
whose proceeds are intended to finance “green projects”. They are designed for companies and
public entities seeking to raise capital for environmentally sustainable investments (ICMA 2021).
According to the PSF report (2025-c, 11), they remain dominant channels for sustainable
investment. Outstanding green debt in the EU reached roughly EUR 1.7 trillion in 2023, which
reflects growing market confidence and a shift in investor preferences.
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According to Abouarab et al. (2025, 957–958), the disclosure obligations have strengthened market
discipline and reduced greenwashing among Article 9 funds. The authors find that Article 9 funds,
which have explicit sustainable investment objectives, significantly reduced their greenwashing
levels compared with unclassified or Article 6 funds. In contrast, Article 8 funds showed no
significant reduction in greenwashing in the same period. This uneven reaction indicates that the
SFDR initially favoured better-resourced and transparent funds, giving them a short-
term competitive advantage while others faced adjustment challenges. Still, these early implications
of a more transparent market increase trust in the markets, potentially leading to more investment
flows to the EU. Eurosif (2025, 15–16) further states that by adopting double materiality and
mandatory disclosures under the CSRD and the expanded SFDR, companies will generate
comparable and verifiable sustainability data. The evidence also suggests that the EU Taxonomy
already influences firms beyond the EU.
Despite these positive signals, empirical evidence suggests that the framework’s short-term market
impact remains limited. Meller (2025) argues that capital flows have not yet shifted substantially
toward taxonomy-aligned activities. The author has approached the topic by analyzing regulatory
evaluations and financial market data. According to her (2025, 5), it would be natural for the EU
Taxonomy to be the reference framework for EU green bond issuance, as it classifies what is
considered sustainable. This is also emphasized by the European Commission, which states that the
Taxonomy should be used as a planning and strategy framework, not just a reporting tool (EUR-Lex
2023). However, Meller points out that according to the PSF 2024 report, only 6.5% of green bonds
issued by EU corporates were aligned with the Taxonomy by 2024, despite the regulation’s
introduction in 2020. This suggests that the Taxonomy has not yet become the standard in green
bond issuance.
This issue is also apparent under SFDR. Data from Bloomberg (2024) shows that among investment
funds under the SFDR Article 9 that allocate more than half of their assets to environmentally
sustainable investments, the average Taxonomy commitment is only 5%, with the median at zero
(Meller 2025, 6–7). Lucarelli et al. (2023, 15) support Meller’s claims when comparing companies
in the Taxonomy sectors, referring to industries deemed sustainable by the EU, before and after
2020. Their research indicates that the coefficient was positive but not statistically significant. This
means the result is not sufficient to prove that the Taxonomy prompted firms to invest more, even
though the risk of losing funding opportunities should encourage companies to increase their
investments. This suggests that the EU’s sustainable finance framework has yet to significantly shift
capital towards sustainable activities, restricting immediate competitiveness for EU firms.
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In addition, the framework’s influence on investment flows is visible beyond the EU’s borders. As
discussed in Chapter 2.2.2, the framework’s extraterritorial reach means that non-EU investors must
increasingly comply with EU standards to access its markets, influencing international investment
patterns. According to EDFI’s report (2023, 6-7, 56), in the short-term, the framework can create
barriers to cross-border capital flows by a regulatory asymmetry: EU sustainable finance rules
assume European data standards, governance systems, and disclosure infrastructures, which
are absent or inconsistent in many low- and middle-income countries (LMICs). As a result, even
genuinely sustainable projects outside Europe cannot provide the required data for the Taxonomy or
the SFDR compliance. Consequently, EU investors face higher compliance costs and greater
reputational risk when investing outside the EU than competitors from jurisdictions with less
stringent rules, for example, the U.S or China. In turn, LMICs’ investees often lack systems to
collect the detailed data for the CSRD and SFDR. This forces EU investors to fund data-gathering
and verification efforts themselves (EDFI 2023, 60), creating financial and administrative burdens
that reduce their ability to compete on cost and speed with non-EU actors.
4.1.2 Firm-level consequences
Brabec and Macháč (2025, 6) find that the Taxonomy’s short-term impacts are uneven. Large firms
benefit from improved financing conditions because they already have the resources to align
disclosures with the Taxonomy. In contrast, small and medium-sized enterprises (SMEs) face
disproportionately high reporting costs and difficulties gathering the data required for green-asset
ratios. This creates an investment asymmetry that favours well-resourced companies (Lucarelli et al.
2023, 13–14). Hence, large firms with clear, taxonomy-aligned revenues gain better financing
terms and an enhanced market reputation, giving them a short-term competitive advantage
compared to SMEs in high-emitting industries. This asymmetry can reduce the EU’s economic
cohesion, thereby indirectly affecting investment attractiveness.
The evidence that firms in high-emitting industries gain better financial terms suggests that the
EU’s sustainable finance framework appears to overlook the role of transition finance, which the
theoretical foundation presents as an essential component of sustainable finance (Chapter
2.3.1). Transition finance recognises that many firms, particularly those in energy-intensive sectors,
cannot immediately meet the green criteria, but are nevertheless critical to achieving the EU’s long-
term climate goals (European Commission n.d-a). However, the findings suggest that the current
EU framework places disproportionate emphasis on end-state sustainability, leaving limited room
for activities that are still on a pathway toward taxonomy-alignment. Hence, the classification of
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activities as either “sustainable” or “non-sustainable” fails to reflect the complex technological and
structural realities of decarbonisation (Meller 2025, 8–9). Overlooking transition finance may
create misaligned incentives, where firms prioritise easily reportable sustainability achievements
rather than long-term strategic investments that would reduce emissions over time.
Firms also face difficulties collecting the information needed for green-asset ratios and technical
screening criteria, which particularly affects SMEs. According to private sector actor, this data-
heavy nature of sustainability criteria increases complexity and decreases investment agility
(O’Callaghan-White & Sofia 2024, 6–9). This is also emphasized by report from Eufosif (2025, 13),
who notes that firms and investors face substantial administrative and data-collection costs due to
the limited availability of taxonomy-aligned CapEx data. Additionally, determining whether an
activity “contributes substantially” to climate mitigation requires complex technical assessments,
often beyond the capability of smaller institutions (Mezzanotte 2023, 856-862). The asymmetry
between the data available on large corporations and SMEs, and the tools for gathering it, further
risks widening the investment gap and potentially undermining inclusivity in the EU market. In
addition, the resource constraints of SMEs may lead to superficial disclosures and increased
greenwashing, in contrast with the desired goal of the framework (O’Reilly et al. 2024, 405). The
fact that the reporting requirements will most likely differ from corporate reporting requirements in
other jurisdictions adds further challenges and compliance burdens (EDVI 2024, 60). Hence, the
extensive data requirements may ultimately weaken sustainability reporting, possibly turning it into
a meaningless compliance exercise rather than fulfilling its purpose of supporting consumers in
making well-informed decisions (Kaakinen 2024).
However, the theoretical foundation of this thesis suggest that the initial burdens of the framework
can be understood as a normal early stage of institutional change. As presented in Chapter 2.1,
institutional research shows that when new institutional layers, such as the sustainable finance
framework, are introduced, organisations must adjust their existing systems and internal processes.
This may cause initial implementation challenges, including administrative burdens and compliance
costs. Therefore, the findings above indicate that the EU’s sustainable finance framework is
beginning to function in line with the predictions of the institutionalisation process. According to
research, the burdens and uneven implications on SMEs and large firms may decrease as the new
rules are gradually internalised (Chiu 2018, 301; North 1990, 92–95). Institutional research also
highlights that the experienced burdens vary among firms depending on their approach to the
change. Firms that react only at a surface level tend to experience the burdens as pure cost. In
contrast, firms that aim to integrate sustainability into their strategy can turn these early investments
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into long-term advantages, such as improved investor trust and innovation opportunities (Galleli &
Amaral 2024, 22–23).
4.1.3 Regulatory complexity and uncertainty
Research emphasizes that a significant factor undermining the effectiveness of the EU sustainability
framework is regulatory uncertainty and complexity (Meller 2025, 7; Brabec and Macháč 2025, 6;
Lucarelli 2023, 14–16; Mezzanotte 2023, 846). Mezzanotte (2023, 848) argues that a significant
factor reducing the framework’s usability is regulatory density. This relates to the increase in
overlapping legal instruments that often address similar issues across different regulatory
frameworks. As mentioned in Chapter 3.3, definitions of sustainable investment appear in both the
SFDR and the Taxonomy, but they are not entirely consistent with each other. Meller (2025, 12)
notes that the SFDR definition of ‘sustainable investment’ is broader than that of the Taxonomy’s
and does not establish precise minimum requirements for what constitutes a significant contribution
or when an investment poses a significant harm. This requires financial market participants to
assess and disclose their own assumptions, which can lead to confusion. This is reflected in the
European Commission’s public consultation on the SFDR in 2023. According to 62% of
respondents, the regulation has not successfully improved protection for end investors nor made it
easier for them to compare products with sustainability claims (European Commission 2023-a, 5).
Mezzanotte (2023, 848) also notes that the frameworks’ cross-referencing and functional
dependence causes complexity. For example, compliance under one regulation (e.g., SFDR) often
depends on information generated by another (e.g., CSRD), which may not yet be implemented.
These elements make the EU framework systemically complex, where understanding and applying
the law requires navigating a constantly evolving network of interconnected rules. Mezzanotte
(2023, 880–889) warns that complex rules amplify companies' compliance burdens, including
cognitive, operational, and system-related problems. These, in turn, promote “noncompliance” and
reduce market efficiency. In addition, when firms and investors face compliance expectations, they
tend to delay sustainable investments and allocate resources toward compliance infrastructure rather
than innovation and growth (Mezzanotte 2023, 885–886; Lucarelli et al. 2023, 13–14). As discussed
in Chapter 2.3.2, institutional preconditions for innovation and development are crucial for creating
a competitive advantage. This means that the regulatory uncertainty can impose serious harm to EU
firms’ global competitive position. In addition, the complexity and uncertainty can reduce investor
trust, making the EU less attractive for investment.
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According to institutional theory from Chapter 2.1, the gradual process of embedding the
sustainability rules into firms’ core functions may be the answer to the problems related to
complexity and uncertainty. The new regulatory approaches enter a governance environment
already filled with norms and expectations. This makes coherence difficult to achieve immediately,
and firms may face uncertainty and fragmentation as they try to interpret new requirements (Chiu
2018, 301; North 1990, 92–95). As North (1990, 89–91) notes, institutions reduce uncertainty only
after actors internalise them. After that, the framework may gradually foster a more predictable and
transparent institutional environment. This suggests that what appears today as regulatory
complexity may, over time, evolve into a structure and efficiency.
Nevertheless, Mezzanotte (2023, 848) acknowledges that complexity is not inherently harmful. The
main question remains whether the benefits of complexity outweigh its costs. In the short term, the
EU’s sustainable finance regime appears to have leaned too heavily towards the former, developing
complex legal instruments at the expense of accessibility and usability. Kaakinen (2024) also points
out that for the green transition to succeed, it must be supported by legislation that is consistent,
easily implemented and useful for business.
4.1.4 Political reactions
The short-term problems of the EU’s sustainable finance framework are well reflected in politics. A
good example of this is France’s president Emmanuel Macron’s call for a “regulatory pause” in
2023. Macron argued that Europe has already imposed extensive regulations: “We are ahead, in
regulatory terms, of the Americans, the Chinese and any other power in the world,” and hence “we
must not make new changes to the rules … otherwise we will lose all the players.” (Le Monde,
2023). Macron highlights that the EU’s policy-making cycle is front-loaded with ambitious targets,
such as the Green Deal, and layers of rules. Still, the pace of implementation and enforcement lags
behind. This is also noted by Kaakinen (2024), who emphasizes that the sustainable finance
framework has been set up at an unusually fast pace. Hence, according to Eurctiv’s analyst Leguet
(2023), Europe faces a risk of being “the best performers in terms of regulation, but the worst
performers in terms of financing”. This can lead stakeholders, like businesses, member states, and
citizens, to feel burdened by rulemaking without seeing the promised returns. This can decrease
trust in the EU market, and possibly, in the EU as a whole.
Macron also argues that if the EU keeps adding new environmental rules while expecting
companies to invest heavily in the green transition, it will make European industries less
competitive compared to those in the U.S. or China, where businesses receive more financial
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support and face fewer regulations (Le Monde 2023). Research shows that it is true that the EU’s
regulatory burden is high and growing faster than in other major economies. Between 2019–2024,
around 13,000 EU legislative acts were passed, compared with about 3,500 federal laws in the U.S
(Draghi 2024, 69). Therefore, Macron does not want to abandon environmental goals, but rather to
focus on financing what’s already been agreed on to protect European competitiveness. This is also
stated by the Net-Zero Industry Act commentary, which highlights that Europe must step up
investment and industrial policy to avoid falling behind (EEA 2023).
However, political research rejects the idea of France’s regulatory pause, arguing that policy
certainty and regulatory continuity are more beneficial to competitiveness than deregulation
(Nguyen 2024; O’Callaghan-White & Sofia 2024, 10–11). O’Callaghan-White & Sofia (2024, 10–
11) stress that stable, coherent and predictable regulation supports market confidence and
investment flows into low-carbon sectors. If even one member state turns away from the common
regulatory direction, it risks creating fragmentation that distorts competition and weakens the EU’s
overall ability to attract capital.
4.2 Long-term impacts
When assessing the long-term impact of the EU’s regulatory framework, it is important to recognize
that these effects are mostly speculative. The framework remains relatively new and continues to
develop in response to new regulations and global changes. For instance, the first reports under the
CSRD are to be published in 2025 (European Commission n.d-e), making it difficult to estimate the
directive’s impact in practice yet.
4.2.1 Innovation and productivity effects
The European Commission’s 2024–2029 priorities define competitiveness and sustainability as two
sides of the same long-term vision. Europe aims to remain a global economic power while leading
the green and digital transitions. Its overarching goal is to achieve the objectives of the European
Green Deal, while maintaining productivity growth, industrial innovation, and social cohesion
(European Commission n.d-f.). The European Commission’s 2025 Strategic Foresight Report also
stresses that by 2040, Europe’s global competitiveness will rely on its ability to innovate and
compete with other economies, particularly in net-zero and digital technologies (European
Commission 2025-c, 10). Similarly, the commission’s report emphasizes that cleaner technologies,
resource efficiency, and digital innovation are expected to form the backbone of Europe’s next
growth model (European Commission 2025-b). At the same time, the EEA (2025) estimates that the
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EU is on track to achieve a 54 % reduction in greenhouse gas emissions by 2030, close to its 55 %
target. If current trends continue and investments in clean technology accelerate, full climate
neutrality by mid-century appears achievable. However, EEA emphasizes it will require further
policy efforts and capital mobilization.
The research views sustainability as inseparable from competitiveness, aligning with European
Commission. Initially, the green transition will bring cost pressures, but if implemented effectively,
it can become a source of competitive advantage: opening new markets, leading in clean
technology, creating jobs, and boosting export potential (Draghi 2024, 13–14; Ghauri 2023;
Andersson & Arvidsson 2023; Tarnovskaya 2023). This perspective is supported by the theoretical
framework outlined in part 2 of this thesis, especially by institutional and competitiveness theory.
The findings of Fabrizi et al. (2024, 12–15) further illustrate that the mechanisms supporting the EU
sustainable finance framework closely align with the drivers of long-term competitiveness in
advanced economies. The authors demonstrate that stringent environmental policy increases
innovation and export performance, both directly and via higher patenting, supporting the Porter
hypothesis. This is confirmed by the European Investment Bank (2024, 190–191), which observes
that environmental rules stimulate product and process innovation, especially in more polluting
sectors that offer the largest efficiency gains to capture. In addition, decarbonisation and
competitiveness policy are crucial to Europe’s strategic autonomy as they are to its economic
competitiveness. It can reduce the EU’s dependence on imported fossil fuels, critical materials, and
foreign technologies, thereby strengthening EU supply chains (European Commission 2023-b, 10–
11).
Although progress toward the Green Deal targets is evident, research raises concerns about the
EU’s longer-term competitive position. Innovation is increasing, but structural challenges may limit
future growth. According to Mario Draghi, the former President of the European Central Bank and
one of Europe's leading economic voices, Europe can no longer rely on the same growth model it
trusted in previous decades. In the report that the European Commission commissioned from him
(“Draghi Report”, 2024), he identifies key structural challenges: slowing productivity, demographic
pressures, rising energy and raw-material costs, and growing global competitive pressure. Draghi
(2024, 24) notes that if the EU continues at its current average productivity growth of about 0.7%
per year, economic output will remain flat until 2050. He argues that the EU’s growth has been too
low and that, unless action is taken, the EU risks what he calls a “slow agony” of lost growth and
reduced global influence. As research suggests in Chapter 4.1, Draghi (2025, 15–17) also
36
emphasized the importance of reducing regulatory complexity, cutting administrative burden,
enabling faster standard-setting and decision-making to keep pace with global rivals in the future.
Draghi (2024, 13) highlights Europe’s weakening position in global technology, innovation and
trade. Only four of the world’s top 50 technology companies are European, and the EU’s share of
global tech revenue fell from 22% to 18% between 2013 and 2023. He also notes that productivity
in the EU has grown at roughly half the rate of the United States since 2000. European firms invest
significantly less in innovation and industrial transformation than their U.S. and Chinese
competitors (Draghi 2024, 26; EIB 2024, 140). This is also noted by the EIB (2024, 140), which
observes that European firms account for only 10% of innovation leaders since 2017, while the U.S.
contributed 45% and China 32%. According to Draghi (2024, 30), fragmented capital markets and
regulatory complexity prevent European firms from scaling. He argues that simplifying rulemaking
is essential for strengthening the Single Market. In addition, Ghauri et al. (2025, 7) note that small
firms often outperform large ones in innovation speed. Therefore, it is crucial to reduce
administrative burden, especially for SMEs, to ensure the EU’s future competitiveness in green
innovation.
4.2.2 Global positioning and spillovers
Research also suggests that, over time, maintaining consistent implementation of the sustainable
finance framework allows the EU to position itself as a global standard-setter. A key feature of
the framework is its high level of detail. For example, the Taxonomy covers several hundred pages
and provides one of the strictest technical definitions of sustainability worldwide. This makes the
EU framework significantly more sophisticated than any international ESG standard (Zetche 2022,
660). This clarity makes the EU a potential global benchmark for defining sustainable investments.
The SPF report (2025, 365) confirms that international jurisdictions are actively following the EU’s
lead in developing their own sustainable finance taxonomies. For instance, countries such as Hong
Kong, Thailand, Rwanda, Brazil, and the UK are modelling their taxonomies on the EU’s. This can
be regarded as a demonstration of the Brussels effect, where countries outside the EU adapt their
practices to align with EU standards, as explained in Chapter 2.2.2. This is vital for the EU’s global
competitive position, as the framework’s international influence could increase the competitive
burden on non-EU firms, thereby creating a level playing field for EU firms operating under
rigorous standards. However, research notes that the framework lacks detail on the social and
governance dimensions of ESG standards (Zetzsche 2025, 678; O’Callaghan-White & Sofia 2025,
16). This limitation can prevent it from becoming a widely used global benchmark.
37
The EU’s international influence also exposes it to global challenges. Mertens & van der Zwan
(2025, 2-3; 15–16) highlight the anti-ESG movement as a growing political force, which is spilling
over into European politics. Originating primarily in the United States, the backlash is driven by
conservative politicians and fossil-fuel-aligned interests that portray ESG practices as a form of
“woke capitalism.” These pressures have pushed several large U.S. financial institutions to distance
themselves from climate-related alliances, signaling an erosion of global ESG cooperation. Within
the EU, this rhetoric tends to be reframed around concerns about competitiveness and
administrative overload, especially for SME’s. Consequently, elements of the EU’s sustainable
finance framework, most notably the EU Taxonomy and the CSRD, have become targets of
political resistance. Some member states, including Germany, have called for delays or exemptions
to reporting rules (Mertens & van der Zwan 2025, 12–13).
4.2.3 Political trajectory and institutional stability
If the presented structural weaknesses are addressed, theories and research support the view that
the EU’s sustainable finance framework could enhance both sustainability and competitiveness
(Meller 2025, 17; Eurosif 2025, 18–21). To address this, the European Commission has launched
the 2025 Omnibus Simplification Package, which aims to reduce the growing administrative burden
while preserving the ambition of its climate goals. The package proposes easing corporate
sustainability reporting by limiting the number of required indicators, introducing lighter reporting
obligations for smaller firms, and reducing data requirements (European Commission 2025-d).
Between 2024 and 2029, the objective is to reduce administrative burdens by 25% for all companies
and 35% for SMEs (OECD 2025, 97). This could allow firms, especially SMEs, to redirect
resources toward productivity, research, and green innovation rather than paperwork. Simplified
and more predictable rules also reduce uncertainty, making it easier for companies to plan long-
term investments and scale operations within the Single Market (OECD 2025, 98–101).
However, some researchers argue against the Simplification Package, claiming that it risks loss of
transparency, deregulation and greater policy uncertainty (CEPS 2025; CCEEL 2025). The report
by EDFI’s (2025, 5–7) highlights that a crucial factor in the EU's long-term success is market
adaptability. Although many short-term challenges exist, the market is expected to adapt and
develop to the new requirements. EDFI (2025, 55–57) claims that the demand for sustainability
disclosures will drive innovation in ESG analytics, auditing, and data platforms, ultimately reducing
trade-offs. This is supported by the institutional research (Chapter 2.1), which notes that the
compliance burdens discussed can be seen as initial implementation challenges, rather than an
38
unexpected flaw of the EU’s sustainability finance framework. Hence, they will reduce as the
framework is internalised. This is confirmed by Hautala (2025), who notes that as firms have been
investing more in sustainability reporting, the costs of it have been declining as practices become
standardised. At the same time, the strategic benefits continue to grow.
The Simplification Package has also divided opinions among the EU Parliament and Commission,
causing political tension. For instance, the former MEP Heidi Hautala emphasizes how the political
narrative towards sustainability legislation has shifted between the von der Leyen Commission’s
first and second terms. Whereas the first Commission made the European Green Deal its flagship
initiative, the second has moved toward weakening sustainability legislation by prioritising
competitiveness over it. According to Hautala, this policy turn has been reinforced by political
pressure from the U.S., as concerns have been raised that the EU’s requirements could hinder
transatlantic trade. In addition, the pressures from the anti-ESG movement discussed in Chapter 4.2
can be perceived to have influenced the simplification actions (Mertens & van der Zwan 2025, 12–
13). Similarly, MEP Sirpa Pietikäinen warns that recent political decisions in the European
Parliament have watered down key corporate responsibility provisions to the point that they
threaten their effectiveness. This has been driven partly by what she calls a “populist anti-reporting
backlash” within the current parliamentary majority. These concerns from the EU politicians
suggest that the timing and nature of the package reflect a broader political shift in the EU’s core
ambitions.
Vice-President of the European Parliament Javi López (2025) further emphasizes that the calls for
simplification must not be used to scale back the EU’s environmental commitments. Aligning with
the official strategic approach of the EU, López highlights that the Green Deal should be understood
as a source of long-term growth and competitiveness. However, Pietikäinen and Hautala highlight
that if deregulatory pressures continue to intensify, the EU risks weakening the very mechanisms
intended to safeguard economic resilience and the green transition. This creates a real possibility
that future reforms could progressively ruin the regulatory foundations of the Green Deal, with
long-term implications for both sustainable integrity and the EU’s strategic economic position.
Ultimately, this illustrates that the future of EU sustainable finance is shaped not only by technical
design or market logic but also by political struggles.
The theoretical foundation of this thesis aligns with the perspective of Hautala and Pietikäinen
about the possible negative implications of the Simplification Package. Although it may reduce
short-term administrative burdens, ultimately, it could weaken the impact and trust in the EU’s
39
sustainable finance framework. As discussed in Chapter 2.2.1, the EU’s “race to the top” regulatory
approach creates a market environment built on credibility, transparency and long-term stability.
The reduction of indicators and easing reporting requirements risks undermining the very
transparency that the EU has aimed to build on. In addition, by lowering requirements for SMEs
without differentiating between high- and low-impact sectors, the package may cause
inconsistencies and reduce the usefulness of reported information. This could unintentionally widen
information asymmetries and weaken the credibility of EU-wide sustainability disclosures (S&P
Global 2025). The report by O’Callaghan-White and Sofia (2024, 10–11) further builds on this,
emphasizing that predictable guidance from lawmakers encourages private investment and the
development of long-term investment strategies. This stability allows financial actors to reduce
initial compliance costs, build necessary systems, and gradually internalize the new sustainability
standards. Thus, the report suggests that a clear and coherent vision by the EU Parliament and
Commission is more important for reducing compliance burdens than going backwards on the
already agreed.
Chapter 2.2.2 about regulatory spillovers suggests that if the framework becomes less stringent, the
EU risks losing its status as a global standard-setter. EU rules have inspired sustainability
frameworks across Southeast Asia and Latin America, suggesting that the EU has already been
shaping global norms. If the EU retreats now, there is a risk that it loses the progress and
opportunity to become a global forerunner of sustainable business (Hautala 2025). Such a shift
would also weaken the credibility and predictability of the EU’s regulatory model, both of which
are critical for spillovers to occur, as firms and governments only adopt foreign standards when they
appear stable and ambitious (Bradford 2020, 31–38). This would reduce the likelihood that non-EU
firms will voluntarily align with its rules, enforcing the regulatory asymmetries between EU and
non-EU firms. Hence, EU-based firms could be disadvantaged compared to competitors in
jurisdictions with looser disclosure regimes, reflecting a classic “race-to-the-bottom” concern
(Vogel 1995, 5–6).
4.3 The connection between practical and theoretical implications
The findings of Chapter 4.1. and 4.2 illustrate that the EU’s sustainable finance framework is
operating along the paths anticipated by the theoretical lenses outlined in Chapter 2, although in
uneven ways. From an institutional perspective, the observed administrative burdens, data gaps, and
uncertainty reflect the early-stage frictions predicted by institutional theory. Rather than signalling
failure, these short-term pressures confirm that new rules initially disrupt existing routines before
40
becoming embedded. The variation in firms’ responses, ranging from superficial compliance to
strategic integration, mirrors the theoretical patterns of legitimacy-seeking, decoupling and
transformation. This indicates that firms are still navigating how to internalise the framework within
their organisational systems. As the framework is relatively new and continuously developing, this
can be anticipated.
The findings also align closely with the dynamics of regulatory competition and spillovers.
Although high complexity and compliance costs of the legislation may temporarily weaken EU-
based firms’ competitiveness, the increasing market transparency and trust have the potential to lead
to long-term advantage. The EU legislation is also beginning to influence markets beyond its
borders, as governments are standardising sustainability metrics globally to match its requirements,
reflecting the early stages of the Brussels Effect. At the same time, the political debate around
simplification demonstrates that regulatory credibility is essential. If the EU weakens its standards,
the incentive for external actors to align with EU rules diminishes, reducing spillover potential and
reinforcing regulatory asymmetries between EU and non-EU firms.
Through the lens of sustainable finance theory, the findings confirm that the market’s ability to
price sustainability depends on the availability of reliable, comparable and decision-useful
information. Current implementation challenges, particularly inconsistent data, unclear rules, and
the disproportionate burden on SMEs, slows down this process and limit the theory’s expected
short-term effects on capital allocation. Nevertheless, the long-term signals are consistent with
theoretical predictions: as data quality improves, investors increasingly rely on EU-aligned
disclosures. Hence, firms with credible sustainability practices benefit from enhanced risk
management, reputational gains and lower financing costs.
Finally, the findings reflect the dual nature of competitiveness theory. The short-term challenges
identified reflect the initial trade-offs highlighted in early competitiveness research. Firms facing
significant regulatory burdens may experience reduced operational efficiency and additional costs,
weakening their competitive position. However, the long-term practical findings align more closely
with the expanded understanding of competitiveness advanced by Porter & Kramer (2006).
Companies that respond proactively to sustainability requirements gain reputational benefits,
improved investor trust and lower financing costs. These outcomes are consistent with the shared
value approach, which views sustainability as a strategic asset that enhances competitiveness. The
findings also support the Porter Hypothesis, which argues that well-designed environmental
41
regulation can stimulate innovation and generate “innovation offsets” that compensate for
compliance costs in the long run.
The Figure 4 concludes the practical and theoretical implications of this thesis. It illustrates how the
EU’s sustainable finance framework operates through three primary channels of influence—
institutional, regulatory and financial—each associated with theoretical expectations. These
expectations are then compared with the empirical findings, revealing how the framework functions
in practice and where deviations from theory emerge. Taken together, the practical findings and
theoretical lenses form a common conclusion: the EU’s sustainable finance framework is in a
transitional phase where short-term costs coexist with emergent long-term benefits. Its ultimate
impact on competitiveness depends on how effectively the EU maintains regulatory ambition while
improving clarity, stability, and the conditions for growth.
42
Figure 4 The practical and theoretical implications of the EU’s sustainable finance framework
However, the findings also reveal important dynamics that the theoretical foundation did not fully
anticipate. First, the magnitude of complexity, particularly the technical depth of the Taxonomy
criteria and the data demands of the CSRD, possibly exceeds what most theories assume about
early-stage institutional friction. Theories expect adjustment costs, but they do not fully capture
how unequal capacity across firms can amplify those costs and create structural disadvantages.
Second, the political volatility surrounding the framework was not fully predicted by theories of
institutional or regulatory development. These theories emphasise gradual evolution, yet the rapid
43
shift in political priorities and the threat of deregulatory action introduce uncertainty that
undermines the stability assumed in the theoretical models. These political shifts are increasingly
enforced by the global competitive landscape and international political trends, shaping how EU
policymakers balance sustainability goals with economic competitiveness.
44
5 Conclusion
This thesis explored how the EU’s sustainable finance framework influences investment flows and
the global competitiveness of EU-based firms. It analysed current developments in the EU’s
sustainable finance legislation and discussed both its short-term and long-term effects on the EU’s
standing in the global economy. By doing this, it answered the main research question of this thesis:
How does the EU’s sustainable finance framework influence its competitiveness and global
position? The thesis contributed to existing research by integrating institutional theory, regulatory
competition, sustainable finance and competitiveness theory to explain how a sustainability-driven
regulatory framework interacts with global financial markets. Moreover, it combines emerging
empirical findings on the early results of the Taxonomy, the SFDR, and the CSRD, providing a
unified view of their market impacts and strategic implications.
Chapter 2 presented the theoretical foundation for analysing the EU’s sustainable finance
framework, while answering the firm sub-question of the thesis: Through what institutional,
regulatory, and financial mechanisms do sustainable finance frameworks influence the allocation of
capital and the behaviour of financial actors? It introduced institutional theory, regulatory
competition and the Brussels effect as lenses through which the EU’s regulatory approach can be
understood. These theoretical perspectives helped explain why the EU relies heavily on rulemaking
to shape markets and how its regulation can produce international spillovers. The chapter also
discussed sustainable finance and competitiveness theory, highlighting how regulatory interventions
can generate strategic advantages through innovation, transparency and stakeholder trust. Together,
these theories provided the analytical basis for interpreting the regulatory developments examined
in later chapters.
Chapter 3 outlined the core elements of the EU sustainable finance framework, answering the
second sub-question: What is the EU’s strategy for a sustainable economy, and what are the primary
instruments in its sustainable finance framework? It examined the EU Taxonomy, SFDR, and
CSRD, along with the EU’s broader sustainable finance strategy. Their combined goal is to unify
sustainability reporting, clarify definitions, and reduce greenwashing by establishing consistent
definitions and disclosure standards. The chapter emphasised the framework's importance as a
strategic instrument for guiding capital towards the EU’s long-term transition objectives.
Building on the previously defined theoretical foundation and sustainability legislation, Chapter 4
assesses the sustainable finance framework’s influence on the EU’s competitive position. It
45
answered the final sub-question of this thesis: In what ways does the EU’s sustainability finance
framework influence firms’ competitiveness and investment flows in the short and long term? The
findings indicate that, in the short term, the framework’s effects on competitiveness are mixed. The
EU Taxonomy, SFDR, and CSRD have begun to enhance transparency and address greenwashing,
as evidenced by the increasing issuance of green bonds and higher taxonomy-aligned capital
expenditures. However, empirical studies indicate that capital has not yet shifted significantly
toward taxonomy-aligned assets. Additionally, the frameworks’ complexity, regulatory uncertainty,
and extensive data requirements impose substantial compliance burdens, especially for SMEs and
high-emitting sectors. These dynamics lead to short-term asymmetries: larger firms with better
reporting capabilities benefit from improved financing conditions, while smaller firms struggle to
adapt and face higher costs.
In the long term, the results suggest that the framework may evolve into a strategic source of
competitiveness if implementation challenges are addressed. Over time, harmonised sustainability
disclosures can reduce information asymmetry, enable efficient capital allocation, and stimulate
innovation in low-carbon technologies. By setting detailed sustainability standards, the EU has begun
to shape the global regulatory environment through spillovers, potentially positioning itself as a
global standard. Yet structural challenges, such as Europe’s slower productivity growth, political
resistance, and global competitive pressure, may limit the EU's ability to fully capitalise on its
regulatory advantage. Whether sustainable finance becomes a competitive strength for the EU will
therefore depend on its broader economic and political strategy.
This thesis contributes to existing literature by highlighting several dynamics that are not widely
addressed in current theoretical frameworks. First, the findings refine institutional theory by showing
that early-stage frictions in implementing sustainability regulation are not only organisational but
also political in nature. While institutional theory emphasises gradual embedding and predictable rule
evolution, this thesis highlights that political shifts can interrupt institutionalisation, causing
uncertainty and weakening firms’ ability to internalise new practices. This adds an important
dimension to existing literature, which typically assumes stability in stringent institutional
environments. Thus, this thesis also expands regulatory competition and spillover theory by
highlighting that regulatory spillovers do not only depend on stringency and market size, but also
on regulatory credibility and continuity.
This thesis also advances sustainable finance theory by identifying a gap between formal disclosure
rules and the practical use of sustainability data in investment decisions. The literature often assumes
46
that more data naturally improves market efficiency. The findings challenge this assumption by
showing that inconsistent guidelines and disproportionate burdens on SMEs increase sustainability
risks. Lastly, this thesis adds nuance to competitiveness theory by illustrating how sustainability
regulation can create short-term cost disadvantages alongside long-term strategic benefits. While the
Porter Hypothesis predicts innovation offsets, this research shows that these benefits materialise
unevenly and depend on firm size, resource availability and regulatory predictability. The thesis,
therefore, contributes a more differentiated understanding of when and for whom sustainability
regulation enhances competitiveness.
Several limitations should be acknowledged. First, many long-term effects of the EU sustainable
finance framework remain speculative, as the regulations are still evolving and fully applicable only
in forthcoming years. Secondly, the thesis focuses on the EU as a whole and does not conduct country-
level or sector-specific analysis, even though impacts vary significantly across member states and
industries. Finally, the thesis does not include quantitative modelling or empirical testing, which
limits the ability to establish causal effects on investment flows or competitiveness.
Future research could address these limitations in several ways. Empirical studies using firm-level or
fund-level data could shed light on how regulatory changes alter investment decisions, financing
costs, or innovation outcomes across sectors. Comparative research between the EU, the U.S., and
China would also deepen understanding of how regulatory competition shapes global capital flows.
In addition, further work is needed on the role of SMEs, which are disproportionately affected by
reporting burdens but central to Europe’s innovation capacity. Finally, long-term studies should
examine how the simplification efforts launched in 2025 reshape market behaviour and whether the
EU’s regulatory leadership translates into lasting competitive advantage.
Overall, the research referenced generally agrees that the green transition is inevitable, as illustrated
by global instruments such as the 2030 Agenda and the legally-binding Paris Agreement. In line with
the global commitments to align financial flows with low-emission pathways, the EU’s sustainability
framework – although flawed – is a vital step in restructuring economies to operate within planetary
boundaries. Therefore, efforts to understand the implications of current legislation and revise it
accordingly are not only warranted but desperately needed.
47
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Appendix
Explanation of the use of AI
In writing this thesis, two AI tools were used. Generative AI ChatGPT version 5 was used to help
generate ideas for the topic of the thesis and to narrow down the research questions. However, the
research question was further refined later without the use of AI. After the content was written,
ChatGPT was used to check for possible spelling or language errors. General advice and feedback
were also requested regarding language use and the overall flow of the thesis. Some modifications
were made, critically, in response to its suggestions. However, AI did not modify the content itself,
nor was assistance requested for this. An AI-powered writing assistant Grammarly was also used
while writing to improve the language.
The prompts used in ChatGPT were as follows:
Before the writing process:
• Help me choose the topic of my bachelor’s thesis. I am interested in the EU decision-
making, global dynamics, and sustainability.
• What relevant topics do you recommend I should focus on?
• I am interested in the role of the EU’s sustainable legislation and its relative global position.
Give me ideas for the narrowed-down topic.
After the writing process of each chapter:
• Are there any grammar errors in this chapter?
• Are there any badly phased or unclear parts?
• Any feedback or suggestions on how to enhance the language and flow of the text?
In addition, the Connected Papers AI service was used to find relevant sources for this thesis.