To get to a sustainable economy, finance needs to be based on (1) equivalent considerations of commercial, social, and environmental values and risks, (2) a revised concept of liquidity, not related to listing but based on balanced in- and outflows of cash, and (3) social inclusion. The Commission’s High Level Expert Group on Sustainable Finance (HLEG SF) explores new opportunities.
Financial stability is about preserving the ability to finance for everyone, now and in the future. Sustainable finance decisions are broader than that, meeting the finance needs of today without harming the ability of others to finance their needs now and in the future. These decisions include commercial, social and environmental considerations as equally important.
The European Commission’s High Level Expert Group on Sustainable Finance (HLEG SF) is seeking for ways to stimulate finance that adds value to society and the environment, and they meet three main problems: valuation, liquidity and social inclusion.
First, prudential rules assume that “the applicable accounting framework” will adequately reflect the relevant exposure-value and risks for the bank, insurer, or fund. However, as long as generally accepted accounting rules don’t value nor price in the risk of environmental and social impact, the values represented will be inadequate by definition and thus steer finance decisions in the wrong direction. Integrating social and environmental value, and risks, into accounting frameworks would be preferable. True Price, True Value or True Cost methodologies are alternatives at the moment.
Second, the assumption that listing on a stock exchange guarantees liquidity was falsified during the recent crisis. Even worse, transferability on a stock exchange facilitates potentially harmful and non-sustainable short-term-ism. Over-reliance on market liquidity creates systemic risk (recital 100 CRR). Sustainable companies tend to have longer term committed owners and stakeholders instead of a listing. A new general concept of liquidity in investment rules would be an obligation to control the balance of in- and outflow of cash, and to hold a diversified buffer of liquid assets that they can use to cover short term liquidity needs (as the LCR in CRR).
Finally, while access to finance and investments is still a privilege of the happy few, the UN’s sustainability goals require the participation of all of us. Social cohesion is crucial to tackle climate change. Social inclusion is, moreover, a fundamental value in the European Constitution, ignored by thresholds and hurdles currently imposed on retail investors to participate in an alternative to a bank deposit, crowd-funding, or listed firms only in UCITS. Access for all is thus another challenge on the sustainable finance agenda.
ICODA’s associate partner Linda van Goor works for some stakeholders in the area of sustainable finance. For more information or ideas: email@example.com