Sustainable finance or the rapture of Europe

Marcos Eguiguren
Director of the International Chair in Sustainable Finance
 

The interpretation of the phrase that titles this article is much more prosaic, less mythological and, of course, suggests much fewer bucolic images than those painted by Titian. Here we are referring to that Europe which, held hostage by the governments of the different countries through a mistaken interpretation of the welfare state and by the heaviness of its own political superstructures, holds its citizens and businesses hostage in an ineffective regulatory tangle, the result of its regulatory pathology. Nothing escapes Europe’s regulatory voracity

Americans love the culture of risk; they observe, explore, and innovate. As a result, they lead the world in many fields of business and economics. The Chinese are also beginning to excel in innovation, but still retain their speciality of taking great ideas and turning them into reality efficiently and affordably. That is why they aspire to global economic co-leadership.

Americans love the culture of risk, which is why they lead the world in many fields of business and economics

In the meantime, we Europeans take these innovations and these realities, pick them to pieces and work out how to legislate and regulate them, until we end up stripping them of their soul and essence in pursuit of a supposed hyper-security. As a result, Europe is losing its place in the world by leaps and bounds. And the curious thing is that both European politicians and we, the citizens, remain oblivious to what is happening. Until it is too late.

Although this is a caricature, we must recognise that there is some truth in it. The field of sustainable finance is certainly a clear example.

Europe, the birthplace of sustainable finance

The modern concept of what we know today as sustainable finance was born, de facto, in Europe at the end of the 1960s with the creation of the first ethical banks or banks with values. Later, it evolved with the appearance of the so-called ESG criteria (or environmental, social, and balanced governance criteria, which must be considered when deciding investment policies) and was perfected with the appearance of impact investment funds and instruments. Although today it is difficult for any territory to claim sole paternity for any innovation, Europe’s role in the birth of sustainable finance is unquestionable.

Decades after the birth of the concept of sustainable finance, and just as it begins to gain visibility around the world, the European authorities deliver a regulatory tsunami

Now, many decades after the birth of these pioneering initiatives and as the term sustainable finance begins to gain visibility around the world, European authorities are presenting us with a regulatory tsunami that will be rolled out in four waves between the first half of 2021 and the end of 2022:

• The Taxonomy regulation, which will classify which investments are sustainable and which are not.
• ESG integration, which makes it possible to regulate how these criteria will be integrated into other existing regulations, particularly in the context of consumer protection for financial products.
• The disclosure framework (called SDFR), to increase transparency about the integration of ESG criteria among financial managers and advisors.
• The SRD II directive on long-term shareholder engagement, to oblige investors and managers to have long-term involvement in the companies in which they invest.

I am suspicious about the real impact these regulations will have on the development of a truly genuine ecosystem of financial institutions, investors, and operators willing to voluntarily embrace ethical finance and integrate, regardless of the myriad of regulations, ESG criteria into their investment decisions.

The finance of tomorrow

Institutions that have practised sustainable finance in an integral way and not just as a part of their business, or to comply with regulations, have based themselves on a single concept that is impossible to regulate: intentionality. We are talking about entities and investors that have always, and intentionally, practised sustainable finance because they have understood that this was and is the only way to understand finance. All these intermediaries do not need too many regulations to continue doing what their intention has always told them should be done.

It remains to be seen whether the coming regulatory tsunami can influence a change in the intentionality of the many other financial intermediaries that have not been or have only been tangentially involved in this area of finance. If there is no change in intentionality, regulation is just imposition and red tape.

Institutions that have practised sustainable finance in a holistic manner have relied on a concept that is impossible to normativise: intentionality

Educational institutions must contribute to a deeper understanding of phenomena such as sustainable finance. We must research and disseminate information so that legislators and regulators genuinely understand what their true function is and forget about over-regulation. So that financial professionals understand that sustainable finance is not a fad, a market segment, or just another option, but that it is the finance of tomorrow. Or so that the public understands the true importance of this phenomenon and knows how to distinguish the wheat from the chaff.

Maybe, just maybe, we can avoid “the rapture of Europe” and proudly show our continent’s leadership in this important field, which can accelerate the transition to a better and more humane economy.