Words like “harmonisation” and “convergence” have hovered around discussion of the programme of European Union ESG and sustainability legislation so much that they’ve become almost as associated with it as “Article 8” and “SFDR”. On principle, perhaps that’s where they should be when we’re considering an issue that is as far-reaching, border-defying and potentially planet-changing as sustainability. But they also point to an important dimension in the current state of play for financial regulation: the opportunities for cross-border alignment and the resultant boost in capital flows on all sides.
As an indicator, take the speech by Greg Medcraft, director of financial and enterprise affairs at the Organisation for Economic Cooperation and Development at the 2020 Eurofi Annual Financial Services Policy Summit in November 2020. He emphasised that “global convergence is vital to reduce the potential for regulatory arbitrage” contributing to destabilising cross-border contagion, and that “as global standards have proven effective in fostering deep well‑functioning markets and financial intermediation within and across borders, more is needed in innovative areas of finance to ensure that markets continue to support sustainable and inclusive economic growth”.
Note that ringing tribute to the value of global financial convergence in driving sustainable and inclusive growth, and the warning of the risks of more global financial crises if markets don’t converge.
Medcraft directly addressed ESG issues in his presentation and called for global coordination to “standardise ESG disclosure practices; clearly align metrics with financial materiality; and ensure sufficient comparability of ESG methodologies”. That doesn’t sound like a call for a single, top-down, United Nations-dictated sustainable finance regime. It does, however, imply that regional and national regulators should be working together to make sure that their separate systems are at least broadly compatible.
The number of global regulators now working with, in discussions with, or at least following the EU regulatory platform indicates that the EU might end up accomplishing this almost by default. As much as setting the standard, they’ve sent out the challenge, and it seems to be one that many other regulators are ready to take up. I’m not sure how far this was part of the policymakers’ goals in drafting all this legislation; it certainly is a valuable consequence, intended or unintended.
It would be great for the planet and for the global financial system if the EU regulators and their counterparts worldwide could achieve a two-in-one goal and create a workable regime for ESG regulation at the same time as they create a new global financial platform for driving further – and more sustainable – growth.
