Sustainable finance, all by itself


When we started to work on the ecological part of sustainable finance some five years ago, with our report on the impact of the carbon bubble on the European financial system, this at times could feel quite lonely. It was up to us to push the message with people on the other side of the table, mostly looking highly skeptical, if now outright bored.

Now, returning after a four month sabbatical, I find reports by an FSB taskforce on financial climate disclosure and by the EU expertgroup on sustainable finance. My six wonderful colleagues at the Sustainable Finance Lab are working with leading Dutch financial institutions on finding ways to finance fair and circular smartphones, started two Horizon 2020 programmes on the financing of eco-innovations (INNOPATHS and NATURVATION) and our co-chair gave a presentation on the circular economy in parliament. By invitation of the Dutch central bank financial institutions are making progress in diverse fields as carbon accounting and climate risk assessment, sustainable finance education and impact measurement. The Sustainable Pension Investment Lab has gone live. The movement for now also greening monetary policy is gaining momentum. Just to name some highlights.

So can I go back travelling? Maybe I can, but then again, the issues at stake are just too interesting, and the urgency for change so big, not to want to be involved. How can our quickly increasing insight into the financial risk of climate change, but also biodiversity loss and other ecological issues, be used by financial risk managers and supervisors? And what about the social dimension of sustainability?  What should the sustainable model mandates that the EU expertgroup discussed in its interim report look like? And in what way is the whole phenomenon of purpose driven business relevant to finance?  Questions we will answer in the year ahead.

 

Rens van Tilburg


ECB should look out the window more often


On June 14th ECB Vice President Vitorio Constancio gave a speech at Utrecht University School of Economics on the ECB’s negative interest rate experiment. It was a most interesting lecture in which he argued the equilibrium real interest rate (the rate at which demand and supply for capital equalize) in Europe and much of the West may in fact be negative. Secular stagnation due to low productivity growth, labor replacing technological change and sluggish demand may have pushed demand below capacity and the real interest rate at which Western economies achieve full employment at stable inflation rates could then be negative. A most interesting proposition.

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Mark Sanders


Investors can learn a thing or two from the natural world


While humans have been learning from nature for thousands of years, a formal concept “biomimicry” – which seeks inspiration from nature to solve complex human problems – is more recent. Nature constitutes the source of inspiration for many new products and processes among diverse fields, for example, Tokyo’s rail system inspired by slime molds, Shinkansen bullet train inspired by the kingfisher’s beak and wind turbine blades designed based on humpback whales. These nature-based innovations will play an important role in the transformation towards our vision of a sustainable future.

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Why this Capital Markets Union is a bad idea


In a few months European Parliament will take a vote on the European Commission’s proposal known as the European Capital Markets Union. This proposal aims to create a single European market for capital and eliminate all remaining barriers to cross border investments in the EU. As with the single markets for goods, services, energy and labor, this is, in principle, a good idea. A single market allows for a more efficient use of our limited resources and benefits investors as well as those looking for funding. Moreover, Eurogroup chairman Dijsselbloem has said (e.g. http://www.consilium.europa.eu/nl/press/press-releases/2015/11/04-jd-speech-tatra-summit/) such a Single European Capital Market can help stabilize the Eurozone. It allows surplus countries to invest their excess savings in deficit countries, thus diversifying risk and synchronizing the European business cycle. The Capital Market Union thus aims to mobilize more investment and allocate it better across the EU to help stabilize the Monetary Union.

 

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Mark Sanders


Friend or Foe? Securitization and the Dutch mortgage boom


The revival of the securitization market lies at the heart of the European Commission’s initiative to launch a pan-European capital market union (CMU). Securitization, as an additional source of funding for banks are considered as the solution of unlocking more investments for all companies, especially small and medium enterprises (SMEs) in the EU.[1] However, questionably as securitization in recent history has been mainly used for funding residential mortgages. This note explores the role of securitization in financing Dutch mortgage boom over the last decade.

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Finance in a Circular Economy


The concept of a circular economy is starting to gain traction in the financial community. The concept is an appealing alternative to our current linear economy in which finite resources are being used for the manufacturing of products, which get disposed of and thus wasting a lot of value. This process often produces negative externalities such as pollution of air, soil and water, but also exploitation of people and (unnecessary) poverty.

In a circular economy, all components within that economy have their own niche. All in- and outflows are being used and produced in unique combinations, without waste and with positive total net revenue. Such a circular system is inspired by eco systems and is essentially different from our current linear system.

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Elisa Achterberg


The banker and his grandchildren


President Obama has summarized nicely the conclusions of the hundreds of scientists from the Intergovernmental Panel on Climate Change: “We are the first generation to experience the effects of climate change, and the last who can still do something about it.”

In this, the financial sector will play a decisive role. It will accelerate the development towards a sustainable energy system or slow it down. The question that ING director Koos Timmermans recently received by a popular Dutch radio programme (“What can you tell your grandkids? Did grandfather made every effort to save the world? “),is one which all financial professionals should ask themselves.

Timmermans’ answer may not get his grandchildren wildly enthusiastic, but it was spot on. Timmermans indicated to believe that we can through cooperation of all financial institutions and the government do better than we do now.

That same conclusion has recently been drawn by a UN commission, known as the UNEP Inquiry. After searching the planet for inspiring examples of sustainable finance their final report contains over 100 of those coming from 40 countries. The Inquiry called on each country to formulate the most effective approach for their specific context.

Countries such as Switzerland and China have picked up the gauntlet. The Chinese Communist Party has set itself in its 13th Five-Year Plan ‘ecological civilization’ as the goal. No luxury in a country where in 90% of the large cities the air is unhealthy and 75% of drinking water unsafe. To find the required $ 320 billion per year, a detailed roadmap has been developed towards a green financial sector.

In the Netherlands there are numerous initiatives to make the sector more sustainable. The question is whether these, if executed well and added together, would bring us where we should be. I think the answer can only be ‘no’. More and more solid action is required. It is up to this generation of financial professionals to do that, or they will end up with a mouth full of teeth in front of their grandchildren.

Rens van Tilburg