About ClimLabels

Reaching net zero targets by 2050 requires massive investments from the private and public sector, as well as a supporting financing framework. While there has been a surge in interest in investments that are currently sustainable (such as renewable energy investments), there is a need for stronger financial incentives in current emissions-intensive sectors to help them decarbonize (such as manufacturing or agriculture). Creating better financing conditions for economic activities becoming green lies at the heart of the frequently discussed term "transition finance." The joint research project "Transition Labels in Climate Finance" (ClimLabels) aims to provide academic insights that help to integrate forward-looking perspectives into financial products to incentivize investments in transitioning economic activities. 

The project consortium consists of four research partners and is funded by the German Federal Ministry of Education and Research (BMBF) (FKZ: 01LA2202A). Combining years of experience in the financial sector with profound research experience, the project partners have all necessary qualifications to adequately analyze the key concerns in transition finance and the role of labels in supporting the effort to facilitate more transition. 

The project is organized into five intertwined work packages (WP):

WP1 - Learning from Ecolabels & reliability of “forward-looking” indicators:

Surveys have shown a broad willingness among institutional investors to invest in transitioning ‘brown’ industries, provided that trust is built through clear KPIs and thresholds. Currently, most financial ESG products focus on past ESG performance, excluding transition considerations. This work package sheds light on the explanatory power and trustworthiness of potential firm-level transition indicators.

As a first step, we take stock of the existing transition finance landscape. In particular, we analyse ecolabels for financial products and the extent to which they have already integrated transition (e.g., through indicators) into their label design criteria. Ecolabels are an existing illustration of how both mechanisms of investor impact (capital allocation and engagement) are intertwined and how they can be conceptualised for financial products.

In a second step, we analyse the reliability of existing transition indicators. To select companies with credible transition plans, investors can rely on a number of indicators (e.g., target setting, governance indicators, past investments in green activities, etc.). We conduct an empirical analysis to explore the most relevant forward-looking indicators in terms of explanatory power (i.e., are they correlated with future GHG emission reductions).

WP2 - Configuration of transformation labels and funds:

Building on the findings in WP1, we list specific recommendations for investors and label providers on how to construct financial products with a “transition focus” based on auditable criteria. These recommendations will include recommendations linked to firm-specific characteristics as well as recommended thresholds at portfolio level. Special consideration will be given to market-standard fund management practices for risk diversification (e.g., sectoral and geographical diversification). We also plan to suggest a few hypothetical “transition funds” and compare them with other existing green financial products (e.g., in terms of sectoral composition or historical returns).

WP3 - Laboratory experiments on individual decision-making and market behavior:

In WP3, we will conduct several incentivized laboratory experiments, investigating how retail investors react to labels and financial products focusing on transformation. Furthermore, transition labels will be added to an experimental market setting to analyze the effects of labels on market interactions. This will give the following insights:
1) To what degree are retail investors willing to take a forward-looking perspective?
2) How responsive are retail investors to transition labels compared to other sustainability labels?
3) Under which conditions are transition labels used and gain traction in markets?

WP4 - Field studies on the influence of transformation labels on investment decisions of bank customers and recommendations from financial advisors:

In field experiments we will analyzethe role of transition labels in investment behavior of retail investors and the consultation given by bank advisors. The key goal is to examine how labels should be designed in practice. In a first step, it will be investigated which criteria retail investors use when making their investment decisions and how much sustainability and transformation aspects factor into their decision. Subsequently, by varying the information provided to participants and observing their actual investment decisions after the information provision allows us to assess the impact of expectation updates and labels on investment decisions.

WP5 - Consolidation of empirical findings and policy recommendations:

ClimLabels aims at amplifying the dialogue between researchers, relevant stakeholders, and policymakers at all stages of the project. Accordingly, an advisory board of experts and practitioners is supporting the project. Furthermore, the results will be made available not only to the scientific community by presentations at conferences and publications in peer-reviewed journals but also to the general public and stakeholders in form of, e.g., policy briefs, popular science publications, press releases, etc.