Last month’s three doorstop reports from the EU’s 35-strong technical expert group (TEG) on sustainable finance have the potential to radically repurpose capital markets.
This is the view of Andreas Hoepner*, professor of operational risk, banking and finance at University College Dublin.
Speaking at an IPE seminar on ESG in Amsterdam last month, Hoepner said the taxonomy of environmentally sustainable activities would revolutionise the bond markets by transplanting the ‘use of proceeds’ concept from green bonds into the conventional bond market.
Investors will increasingly demand this sort of transparency from corporates to match their own disclosure requirements – a process Hoepner likens to the “green bond logic on steroids”.
He further predicts that equity sector classifications will soon become redundant as their “one firm equals one sub sector” limitations become apparent given that many large companies are active in more than one sector.
And a future “council of the wise” will govern the classification of economic activity, according to Hoepner, using the green taxonomy.
A key transmission mechanism for this policy body will largely be through bank capital requirements. Hoepner said: “The overriding ambition of the EU is nothing short of developing a dial where you can dial up or dial down the greenness of economic growth. We already have a dial for the speed of economic growth, which is interest rates. What we’re aiming to develop here is a dial for the greenness of economic growth.”
The central question, according to Hoepner, will be where such an institution sits. Within each member state or at EU level? Will it be autonomous, at executive level or at central bank level?
And not to be underestimated: the relative success of the Green movement in the European Parliament elections has suddenly made all this politically more realistic.
Liam Kennedy, Editor
*Hoepner is a member of the TEG in a personal capacity