A sustainable finance conference taking place in a hotel that carries the name of my son? I knew I had to be there!

(For an enhanced experience, this blog is to be read while listening to John Denver singing ‘Take Me Home, Country Roads’.)

As we closed the Consultation on Sustainable Finance in Jersey on 26 April, I knew it was time to take all my thoughts and ideas collected since I joined Government back in March and sound board them with a range of international sustainable finance (SF) experts. I also knew I needed to start making new contacts internationally, this will be very handy in the months to come.

I came across the 3rd Annual European Sustainable Finance Conference organised by the Association for Financial Markets in Europe (AFME) by chance.  It was perfect timing but what was even better is that it took place at the Royal Leonardo Hotel (in Amsterdam), a hotel that carries the name of my son.

It was totally worth it…

I would like to share with you five paradoxes on SF that I reflected upon during my time here in Amsterdam.

(Disclaimer: this blog has been put together in response to the views of, and the information provided, by the speakers. More details on the event, speakers and agenda can be found here.

1) Financial institutions are making far more efforts than sovereign nations in the fight against climate change

Indeed, the financial services and corporate world is currently leading the charge to help transition our economies to meet net zero by 2050 and to avoid destroying our natural ecosystems in the meantime.

During the conference, a chief investor of a very large business was quite vocal in stating that the corporate world cannot do this alone, and that those leading the charge should be the sovereign nations and international organisations that really can influence the transition of their economies or influence macroeconomics through economic and fiscal policy.

Unfortunately, whilst many financial services have developed, at pains, new transition plans, most nations and international organisations don’t have one with National Determined Contributions (commitments made by subscribers of the Paris Agreement) being for the most part, mere political declarations as supposed to detailed plans.

We all have a role to play.

2) Stop thinking Sustainable Finance regulation will achieve global regulatory convergence at some point, it won’t happen

In a financial services world where we are used to see a fair amount of regulatory convergence on key financial services risks (take financial crime risk with the Financial Action Task Force or liquidity risk with the Basel Committee on Banking Supervision for example), it does not look like regulatory convergence will arrive any time soon in the SF field.

Let’s look at corporate sustainability disclosures for example.  The EU joined the party first with the development of the European Sustainability Reporting Standards (ESRS).  Then global stakeholders advocated for a global standard: The International Sustainability Standards Board (ISSB) was created and later began to be adopted by countries like the UK, Singapore, Brazil (very important from a climate perspective), Costa Rica, Nigeria or Turkey.  The ISSB has also been endorsed by the International Organization of Securities Commissions (IOSCO) in 2023.

There’s also, no doubt, a labels fragmentation across jurisdictions which ultimately may not provide investors the clarity they need about their global investments position (perhaps we can discuss this in more detail another time).

But that’s not the end of the world… on disclosures, certain regulatory divergence can be managed, as long as standard setters work on interoperability or comparability (the European Financial Reporting Advisory Group (EFRAG) and ISSB have done so, mapping ISSB S2 (which focuses on climate risk) to ESRS).  The key is to ensure you gather comparable information where a single data set may satisfy more than one requirement.

3) Anti-greenwashing rules, badly designed, may actually lead to an increase of greenwashing or even worse, greenhushing

In simple terms, greenwashing can be described as a practice where sustainability statements made are not reflected in a business or product.  In order words, it is the disconnect between claims and actions, but arguably, also between actions and outcomes.

Greenwashing can take place at entity, product or service level, be it through deficient information, consumer protection practices or in the worse cases, through securities fraud.

No doubt, financial services must not make any false or misleading statements on sustainability claims (or otherwise).  However, in many cases, risks materialise in the form of inadvertent greenwashing.  This means business need clarity and guidance as to how to navigate greenwashing risk.

Where regulations are unnecessarily complex or unclear, businesses may inadvertently breach them and in some cases, avoid making any sustainability claims (when a product is genuinely sustainable) out of fear of getting in the wrong side of the law (that’s what we call greenhushing).

However, businesses need to take this seriously, as greenwashing can lead to financial risk, legal risk and worse, reputational risk as risks can materialise even in places such as social media.

Whilst regulation is part the solution, this is not so much about eliminating greenwashing but to creating an effective deterrence mechanism.

Capacity building in this space is not only for corporates (i.e. internal processes and controls) but also for regulators (considering the materiality of the breach and the maturity of the system) – rightly calibrated anti-greenwashing rules should not deter innovation or lead to greenhushing.

Indeed, most businesses want to do the right thing.

4) Stop obsessing about having green assets in your portfolio, the real impact remains in those brown assets that have good intentions

Investors may be tempted to exit positions in shipping, aviation, manufacturing, mining or metals (considered overall brown) and move to greener assets (i.e. health, tech or financial services).

Well… the reality is that green assets have very little scope of becoming greener but currently benefit of great liquidity.  On the contrary, brown assets struggle more to access liquidity or may access capital at a higher cost, forcing these businesses to look at the short-term cash-flows and therefore, preventing any opportunity to invest in more sustainable practices.  Put it simply, sustainable metal extraction won’t be developed by Google.

Some of the more polluting industries (take minerals extraction) are actually key for the economic transition (think about batteries in cars, solar panels or wind farms).  The key is to ensure brown businesses are committed to invest in more sustainable ways to produce.

So, how do we do that? Have a look at their transition plans or year on year cap ex.

5) Everyone thinks the US is the elephant in the room… it’s not!

When I entered the SF world, I always heard that yes, there is a clear direction of travel but that this direction is somehow put into question because the US is not interested.

That’s not true. The bipartisan bill known as the Climate Inflation Act with a £369bn budget represents a huge investment in energy security and climate change programmes. So, despite some of the headwinds faced by the SEC at Federal level (you can read more about it all here) which meant it has stayed its legislation pending judicial review, some US States have decided to go ahead in implementing even more ambitious rules (which have the potential to apply to tens of thousands of companies) than the SEC plans to.

Let’s take the State of California for example, the fifth largest world economy.   California, victim of raging wildfires in its hot summers is well aware of the importance to manage climate risk and the need for corporates to act.  The SF framework in California includes rules on greenhouse emission reporting, climate risk disclosures and voluntary carbon markets.

As I leave Amsterdam, feeling grateful for having had a few days focusing on just one thing, and mindful of the role we all have to play in ensuring Jersey’s financial services industry successfully adapts (and benefits) from this evolving world, the following lyrics keep playing in my head…

Life is old there, older than the trees
Younger than the mountains, growin’ like a breeze
Country roads, take me home
To the place I belong
West Virginia, mountain mama
Take me home, country roads

About Miguel Zaragoza

Miguel is a Spanish-qualified lawyer with a masters degrees in geopolitics and European affairs from the University of Strasbourg and the College of Europe in Warsaw.  After living in Brussels, where he worked at the European Commission overseeing the funding of wind farm projects, Miguel relocated to Jersey with his British wife.

In Jersey, before joining the Government, Miguel worked for the executive team at the Jersey Financial Services Commission and in a legal team at Royal Bank of Canada Wealth Management International.

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