Back at the end of May I wrote the first blog in a series on the topic of what gets financial peoples attention when we talk about Sustainable Finance. And yes, its mostly, but not exclusively, about money. My starting point is that we all want to deliver change and impact. Which means that we need to be able to persuade companies that sustainability can also add financial value.
In that first blog I discussed the motivations of generating profit now, the potential for future profit, and managing technological pressure. Today I want to round out the list by discussing the motivation to act in relation to regulation/social pressure, and how we get the right mix of carrot and stick. By this I don't mean ESG regulation and reporting. This is about regulation that directly impacts a companies operations, and hence their profit and loss - you must use these buildings materials, your cars must not emit more than X CO2/km, you must stop using gas boilers and you must reduce fertiliser usage by X%. The focus here is on Europe, which is the engagement region I know best.
Just to quickly recap - my professional life has largely been spent persuading financial people to listen: as a corporate finance adviser and banker, as a broker to investment funds, and as an investor: persuading companies to listen and act. I now want to bring the lessons I learnt from this into sustainability finance.
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Regulation and social pressure
When most sustainability and ESG people talk about regulation, they often mean ESG reporting regulations such as the recent update to the European Union Corporate Sustainability Reporting Directive (CSRD).
While these are important, most finance people are more concerned about regulations that have a direct financial impact on their business. A good example of this second type of regulation is Regulation (EU) 2019/631 - which covers the CO2 emissions of road transport vehicles sold in Europe. Non-compliance brings real costs, this is not just about reporting.
From a finance perspective, how do these different types of regulations differ?