A few weeks ago, Frank Elderson, a member of the Executive Board and Vice-Chair of the Supervisory Board of the European Central Bank, wrote an article highlighting the value of developing national accounts during the Great Depression as a tool for assessing public policy. At the time, the accounting and statistical framework designed by Clark and Kuznets sought to be an imperfect simplification of a complex reality, as the accounts were not harmonised and the data they relied on were irregular and incomplete. Even so, this framework became a fundamental instrument for measuring economic progress. It was not necessary to have complete baseline information, nor to strangle the system with demanding regulations in the name of statistical disclosure. The model, which is still imperfect, continues to be improved to incorporate concepts as important as well-being, social equality or sustainability into national accounts, but it was never brought to a halt.
In recent years, the European Union, which was falling behind in global leadership between the US and China, has managed to find in sustainability a space that places it at the centre of the debate. Climate change, the necessary productive transformation required for a more environmentally friendly setting, social equity and sustainable development framed by the 2030 Agenda have become essential principles for the EU. This challenge requires significant public and private financing capacity. For this reason, in 2018 the EU approved an Action Plan for the development of sustainable finance and has just updated it with a renewed sustainable finance strategy to meet the stated ambition of the European Green Deal and to align with the economic support package set out in NextGenEU.
This new strategy to achieve a more sustainable financial system is based on extending the already extensive regulatory framework to encourage the efficient mobilisation of private capital flows, bring it closer to all sector stakeholders and, whenever possible, promote a global agenda of cooperation and consensus among countries. With the leadership embodied by the EU Taxonomy Regulation, this robust strategy aims to become a global benchmark, despite the fact that the raw material for this framework—data—is still incomplete, irregular and of low quality, which makes verification and methodological assessments difficult.
Even so, for European regulators the lessons from Kuznets and Clark are clear: having a rigorous regulatory framework is more than sufficient to create a foundation for the development of sustainable finance, the mobilisation of the capital needed to finance the transition to a decarbonised economy, and to maintain the competitiveness of Europe’s business fabric vis-à-vis other countries.
However, sustainable development bears a strong resemblance to the digital transformation, which originated in 1969 with Vint Cerf and Robert Kahn, creators of the TCP/IP protocols and the architecture of the internet. A framework that later served as the basis for Tim Berners-Lee to develop the World Wide Web in 1989 as a system for distributing interconnected models accessible via the internet.
Despite the constant risk we face with the use of the internet (cybersecurity issues, fraud, etc.), it has not only revolutionised many areas to the point of becoming a necessary global medium in our lives, but by enabling disintermediation and democratising knowledge, digitalisation lays the foundations for genuine sustainable development for all citizens. In fact, it is difficult to understand sustainability without digitalisation.
Digitalisation has taught us two lessons worth remembering. First, it is far more important to create flexible, easy-to-implement protocols and standards on which to design the architecture of what we want to build than to insist on developing a complex and incomplete regulatory framework, often disconnected and inconsistent across proposals from different regulators and supervisors. Second, we should be aware of the risk of stifling financial and technological innovation through over-regulation.
The framework regulating the internet has always been very light-touch and has been developed after the fact to address imperfections. It is difficult to imagine what our interaction with the web would be like if European regulators in the 1990s had sought to anticipate its inherent risks and had devised an immense regulatory apparatus to protect consumers and promote private investment.
Therefore, adhering to the regulatory straitjacket imposed from Europe—at times lost in the twists and turns of official bureaucracy and excessive conceptual complexity—will only foster a spurious leadership that, in a very short time, would have to give way to other countries more committed to impact and action than to rigid compliance with rules (as happened with the digital interconnection protocol Europe backed in the 1980s, Open System Interconexion, which, despite being endorsed by the ISO seal, succumbed to the flexibility of the US standard designed by Cerf and Kahn).
Today, there is a tendency to promote the development of sustainable finance in parallel with regulatory development, through public agreements, integrating sustainability into organisations’ management and strategy, and financing and supporting clients along this path of adjustment towards a decarbonised economy. Banks are effectively incorporating lessons from the past and actively managing the development of sustainable finance because it is not only the sustainability of our planet that depends on it, but the sector’s very survival. A major challenge, because managing the risks and opportunities arising from climate change is a new and complex process for all stakeholders involved.
Europe still has time to combine the lessons of Kuznets and Cerf to define agile, coherent and impactful policies, to foster technological innovation, and to promote sectoral protocols, standards and transition pathways, rather than insisting on leading sustainability through regulation.
Juan Carlos Delrieu, Director of Strategy and Sustainability at the Spanish Banking Association
