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Regulation to finance sustainable growth: less is nothing

30 Noviembre - 2021
Finanzas sostenibles

Marcos Eguiguren
Director of the Chair in Sustainable Finance


The European Union (EU) has been working for years on how to encourage private capital to focus on financing sustainable activities. Measures have already been put in place within the action plan for financing sustainable growth . One of the pillars of the plan is the development of a classification system for sustainable activities which, under the name of Taxonomy Regulation , was approved in July 2020, currently covering objectives and activities in the environmental field.

This Taxonomy should be completed in the coming months with a system that allows classifying sustainable activities, also from a social point of view. To this end, the EU platform for sustainable finance, a permanent group of experts set up, among other things, to advise the European Commission on the development of the Taxonomy Regulation, has published a report for the creation of a social taxonomy that incorporates two dimensions in the definition of what we mean by social.

The Taxonomy Regulation was born as a system for classifying sustainable activities in order, among other things, to be able to facilitate their financing

The future social taxonomy will have a vertical dimension, focused on what companies do (products and services) and another horizontal, focused on how they do things, taking into account the impact on affected stakeholders by the activity of the company.

In order to achieve a balance in the relationships between environmental and social aspects, this report suggests that minimum safeguards in social and governance aspects form part of the environmental taxonomy and that minimum environmental safeguards form part of the social taxonomy that arises from this process. In this way, we ensure that those activities that are primarily financed by EU financial institutions always have a clear social or environmental purpose and that they meet minimum requirements in the other area.

This report for the creation of a social taxonomy is now in the public consultation phase and is expected to enter the final debate phase and be presented for approval to the European Parliament in the first months of 2022.

Seeing these movements one can come to feel pride in our elites, who want the financial sector to make investments with a social and environmental vision. Personally, as an old fox in the field of sustainable finance, since the end of the 90s of the last century, when almost no one talked about these things, I have, as the well-known ballad says, “el corazón partío”. Let me explain.

The future social taxonomy will have a vertical dimension, focused on what companies do, and another horizontal, focused on how they do things

The willful and well-intentioned regulatory offensive of our governments has an interesting point, since it indirectly puts the financial sector in the position to better think about its financing decisions. However, this dimension, which could be considered positive, forgets, as is always the case with our distinguished legislators that, instead of regulating and categorizing everything, it is sometimes better to promote inclusive and solid government models by encouraging adoption by part of the financial sector, with transformative purposes and missions that, in themselves, contribute to changing the culture of organizations and, therefore, their business models.

In other words, the processes and expected outputs are regulated, instead of having legislative frameworks that encourage cultural and governance changes and that, with minimal guidance, deposit the initiative for change in the private sector. If in recent decades there has been a factor that has generated a great consensus among business actors worldwide (absolute consensus is humanly impossible), it is the need to address as quickly as possible the reconversion of the economy towards a paradigm of sustainable development. Believe it or not, dear reader, but in the last ten years, I have not yet met an entrepreneur who is not convinced of the need for conversion. A different thing is the speed of it, which can be different depending on the area.

The categorization and regulation of processes is not always the best option since, in this scenario, business lobbies will always act to try to make sure that the interests of their sectors come out well, while the incentive for a more profound change in governance can make that company that, otherwise, would be lobbying, try to accelerate its transformation in a more convinced and proactive way.

Instead of regulating and categorizing everything, sometimes it is better to promote inclusive and solid governance models by encouraging the adoption by the financial sector of transformative purposes and missions

We are already seeing, as a result of the COP26 in Glasgow, some difficulties in how we qualify some activities. For example, the position defended by France, undoubtedly supported by its powerful energy lobby, that nuclear energy should be considered as part of the taxonomy in its environmental section, has sparked many discussions with supporters and detractors of that initiative. I am not going to position myself on that particular, but it is, without a doubt, an example of how lobbies can influence, not always in a positive way, that taxonomy.

I still believe that different legislative models in which changes in government models are encouraged and companies that have a truly balanced and transformative mission and purpose are promoted, may be somewhat less effective in the short term, but they will surely be much more robust in the long term.

In the meantime, we will have to welcome the EU Taxonomy Regulation, also in its social dimension. Less nothing, but I, I must confess that I still have "el corazón partío ".

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