Protests and Sustainable Finance Disclosure Regulation

Friday the 30th of September thousands of students gathered in the streets of Milan protesting and claiming for the implementation of effective regulations and policies in the realm of sustainability.  

Interestingly, one of the main centers of the protest was Piazza Affari, where hundreds of students and activists showed their lack of confidence and mistrust toward the financial institutions.  

Interviewed by “La Repubblica”, a teenage protestor member of the group Youth 4 Climate Justice claimed that “finance is one of the major responsible for the climatic crisis we are witnessing”, while another criticized the practice of Greenwashing used by both public institutions and corporations to cleanse their image.  

In essence Greenwashing is the process of conveying a false impression or providing misleading information about how a company’s products and operations are environmentally friendly.  

Summing up the protestors, who spent the night in Piazza Affari, criticized financial markets for not doing their part in the transition to a greener and more sustainable economy and for their attempt to capitalize on the growing demand for environmentally sound products.  

Having recognized the relevance and the urgence of this problem, European Union lawmakers in March passed the Sustainable Finance Disclosure Regulation (SFDR), a complex set of rules aimed at making financial funds’ sustainability profile comparable and more easily understandable by both retail and institutional investors.  

The final objective is that of impending greenwashing and other malpractices while driving capital toward sustainably oriented investments and putting the ESG issues on par with traditional financial risk indicators.  

More specifically, under the SFDR EU asset managers are now asked to publicly disclose any adverse impact their investments may have on environmental or social factors and their approach to incorporating sustainability considerations.  

Through this regulation European lawmakers create a mandate for participants in financial markets to do no harm to society and the environment; moreover, it incentivizes publicly traded corporations to make strategic decisions on their approach to sustainability. 

Practically, assuming that the final objective of a firm is distributing earnings to shareholders and increasing the market value of the stock, and that investors favor ESG compliant investments (at least for their lower risk profile), it follows that firms have a strong incentive toward the implementation of more sustainable activities and processes. But this works if and only if ESG criteria are standardized, credible and comparable.  

 From a microeconomic perspective the SFDR substantially decreases the asymmetry of information and the risk of adverse selection: standardized ESG criteria act as a credible benchmark for investors willing to hedge themselves from regulating issues that in the future will harm the companies today not implementing ESG oriented conducts.  

 the SFDR pushed third party actors such as MSCI, S&P Global, and others to create products and services that meet the growing demand for standardized ESG data compliant with the EU regulation that will ensure the actual compliance with the rules. These will also favor the application of the same criteria in the US where a similar regulation is still missing, even if at the top of the SEC’s agenda, as recently confirmed by the Chair Gary Gensler.   

Finally, from the 31st of October to the 12th of November Glasgow will host the XVI UN Climate Change Conference (COP 26): in this occasion government officials and activists among the others will address the topic of Climate Finance, that refers to local, national and transnational sources of financing that seeks to support mitigation and adaptation actions to address climate change. 

Hopefully, if institutions walk the talk at the next Fridays for Future event the activist’s words and slogans will be slightly less harsh and critical toward the financial sector, as it is working for a greener and more sustainable future.