The Greenwashing Threat: Why Sustainable Finance Needs Literacy to Deliver

Financial literacy, usually considered “a combination of awareness, knowledge, skill, attitude, and behaviour necessary to make sound financial decisions and ultimately achieve individual financial well-being” (OECD), has long been tied to the European Union (EU)’s ambition to build a stronger Capital Markets Union. However, as the European Commission has recently noted, only 18% of EU citizens possess a high level of financial literacy (Eurobarometer, 2023), which prompts a new EU financial literacy strategy due in Q3 2026.

If there is one area where discourse on financial literacy can and must go further already now, however, it is sustainable finance. Sustainable finance literacy — the ability to understand sustainability-related products, regulations and labels, such as the EU Taxonomy and the Sustainable Finance Disclosure Regulation (SFDR) — is no longer an optional ‘nice to have.’ It an essential condition for the success of the EU sustainable finance agenda

Recent studies have shown that even among investors with strong sustainability preferences, actual investment behaviour only changes when investors fully understand how to navigate the regulatory and product landscape (Auzepy et al., 2024). In Switzerland, where general financial literacy is high, researchers have found that many households still lack the tools to assess green investment options — and this gap directly influences uptake (Filippini et al., 2024).

As Lusardi and Kaiser (2024) highlight in a review, the most effective financial education does not just transfer knowledge — it builds the capacity to act. And that is exactly what sustainable finance needs. Why? Because without a clear understanding of what sustainability means in financial terms, even the best-intentioned investors can be misled. Greenwashing — “a practice where sustainability-related statements, declarations, actions, or communications do not clearly and fairly reflect the underlying sustainability profile of an entity, a financial product, or a financial service” (ESMA) — thrives in environments where complexity outpaces comprehension.

This is where sustainable finance literacy becomes critical. It acts as a first line of defence by equipping individuals and institutions to question vague ESG claims, decode disclosure documents and differentiate between genuine sustainability efforts and mere branding. When investors lack the tools to evaluate what is behind a ‘green’ label, greenwashing becomes harder to spot — and easier to get away with. In other words, poor literacy fuels the opacity that greenwashing feeds on. Better literacy exposes it.

To take this topic forward, the Florence School of Banking and Finance hosted a dedicated panel during the EUI’s Climate Week[1] focusing on sustainable finance literacy not as an abstract aim but as a practical tool to drive credible lasting change.

In short, sustainable finance will only succeed if its principles are understood, applied and enforced at every level — from policymakers to market participants. This is not just a consumer challenge. It is a structural one.

Financial literacy may get us in the room. But to stay there — and to act effectively — we need something more: clarity, trust and continual institutional capacity. Only by reinforcing these pillars can sustainable finance deliver on its promise of making a meaningful lasting impact.

References

1. Auzepy, A., Bannier, C. E. & Gärtner, F. (2024). Looking beyond ESG preferences: The role of sustainable finance literacy in sustainable investing. CFS Working Paper Series, No. 719.
2. Filippini, M., Leippold, M. & Wekhof, T. (2024). Sustainable finance literacy and the determinants of sustainable investing. Journal of Banking and Finance, 163.
3. Lusardi, A. & Kaiser, T. (2024). Financial literacy and financial education: An overview. GFLEC Working Paper Series.

[1] Organised by the Florence School of Transnational Governance. More information is available at https://www.eui.eu/en/academic-units/school-of-transnational-governance/stg-projects/stg-climate/eui-climate-week/eui-climate-week-2025