Financial Consumers and Sustainable Finance: Policy Implications and Approaches

Sustainable finance is crucial for transitioning to a sustainable, resilient, and inclusive global economy, and mitigating climate change. It encompasses financial products, strategies, or activities that prioritize economic, social, and environmental objectives. Despite its growing importance, there's a gap in understanding its implications for financial consumers, which this report aims to address. The updated G20/OECD High-Level Principles on Financial Consumer Protection (FCP Principles) and the OECD Recommendation on Financial Literacy now recognize sustainable finance as a key cross-cutting theme due to its potential impact on individual financial well-being.

Sustainable finance aligns financial flows and products with sustainable development pathways, considering societal and environmental impacts. While no internationally accepted definition exists, it generally integrates environmental, social, and governance (ESG) factors into financial analysis, distinguishing it from 'green' or 'climate' finance. The G20/OECD High-Level Principles on Financial Consumer Protection provide the international standard for consumer protection, with sustainable finance now a crucial cross-cutting theme. The OECD Recommendation on Financial Literacy also emphasizes its importance for individual financial well-being and mitigating climate-related risks.

Consumer demand for sustainable finance products is increasing, particularly in developed countries, driven by rising environmental awareness and the desire to align investments with personal values. Young people show a strong preference for sustainable investments. However, consumer understanding of these products remains limited, partly due to a lack of standardized terms and definitions, making it difficult to differentiate and compare offerings. This gap in understanding, coupled with overall low financial literacy, amplifies inherent risks and the need for targeted financial education.

Sustainable finance offers opportunities for consumers to align their investments with personal values, achieve financial goals, and build resilience against climate-related risks. However, these products also present specific risks, notably 'greenwashing,' 'social washing,' and 'impact washing.' These practices involve misleading consumers about the environmental, social, or real-world impact of financial products, eroding trust and hindering informed decision-making. The increasing complexity and the dynamic nature of new regulations and products exacerbate these risks.

Policymakers and oversight bodies employ various tools, primarily based on the FCP Principles, to protect consumers in sustainable finance. Key areas include enhanced disclosure and transparency to combat greenwashing, promoting the development of quality financial products that meet consumer needs, and ensuring responsible business conduct and culture, including suitability assessments that consider sustainability preferences. Jurisdictions globally are implementing regulations for climate-related disclosures, developing taxonomies, and addressing misleading claims through regulatory actions and guidance.