EU-funded research and policy insights for sustainable finance – Policy and Research Plenary Session @ FINEXUS Conference

Time and Venue: Thu, 18 Jan 2018, 15:00 – 16:20. Aula KOL-G-201, Univ. of Zurich
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SummaryEU-funded research has been playing and will play a crucial role in the development of the sustainable finance sector. The main insights for practitioners in sustainable finance stemming from successful EU-funded research projects are presented by their coordinators. Projects represented include: SIMPOL, DOLFINS, ISIGrowth, GREEN-WIN, CoeGSS, SEI Metrics, and others. Further, a proposal for a future FET Flagship on sustainability and the future of society in the EU will be presented.

Panelclick here for speaker biographies:

  Stefano Battiston (Professor, UZH)
Filippo Addarii (CEO, Plus Value)
Stan Dupre (Global Director, 2 Degrees Investing Initiative)
Guido Caldarelli (Professor, IMT Lucca)
Giovanni Dosi (Professor, Sant’Anna School of Advanced Studies)
Carlo Jaeger (Professor, Global Climate Forum)

Background information and policy context.

Alignment of finance to climate objectives and in particular 2C target is attracting global public attention. Recent cases include the COP conferences, the recent Climate Finance Day in Paris, several divesting movements for shareholding activism and/or divestment from carbon assets. Some developments are already happening in regulatory frameworks (see e.g. the inclusion of Sustainable Finance in the European Capital Market Union reform, the High-Level Expert Group (HLEG) on Sustainable Finance, the French law “Loi 173” on financial disclosure) and in the practice (see e.g. the Swiss Pension Funds exercise and the action of Development Banks discussed in the sessions of Thursday morning in this conference).

These are welcome developments. They raise also a meta-question: is the Sustainable Finance sector developing in a sustainable way? Indeed, in order for the Sustainable Finance sector to be more than a fashion, we need a credible system to classify sustainable assets and to assess their contribution to sustainability objectives both in social and environmental terms. This is simply not a task that the financial sector can take on all alone. It is a task that involves knowledge from many scientific disciplines, as well as a good dose of system thinking. Further, as we learnt the hard way in 2008, credible rating requires also a good governance system. Otherwise, sustainable finance could very well end up leading to systematic mispricing of large portions of assets. Among EU investors’ portfolios, the portion of assets under management tagged under some sustainability label (SRI, ESG, green, climate, impact, etc.) reaches peaks of 50%. It is clear then that the risk of systematic mispricing on these asset classes is already something we cannot afford.

Yet, too few representatives of research are involved in the discussions on sustainable finance. On the one hand, many academics tend to see this activity as non-academic. It is then important to realise that academic research, in particular within EU-funded projects, is also judged by the impact it makes on society. On the other hand, the public and private financial sector needs to understand that it can benefit from academic research in a fundamental way. The process of generating asset taxonomies and ratings needs to be co-designed with academia and NGOs and needs to be transparent and replicable. On the contrary, the strategy to build proprietary classification and rating systems may serve as a short-term benefit of few actors but it may be detrimental for the sector of Sustainable Finance as a whole and a serious danger for the objective of closing the gaps between sustainability and finance.

This session gathers on stage six experienced EU research project coordinators representing a cohesive network of researchers and projects. The aim is to discuss how and why sustainable finance practitioners may benefit and need (EU and Swiss) publicly funded research in order for the sector to develop organically.

Examples of actionable insights from recent EU-funded research include:

  • How to measure systemic risk in a world where financial contracts are intertwined.

  • How to include climate risk of financial portfolios in traditional risk statistics, which are daily used by decision makers.

  • How to assess the impact of financial portfolios on climate action and how to assess their alignment, in terms of exposure to technologies, with 2C target.

  • How to model the transition of the economy to a green growth pathway.

  • How to model the systemic impact of monetary and macroprudential policies, taking into account distributive effects.

The session is moderated by Stefano Battiston (UZH), coordinator of the projects SIMPOL and DOLFINS (main sponsor of this event). DOLFINS is a large consortium that has been delivering tools to integrate into traditional metrics of risk, crucial aspects of sustainable finance such as systemic risk and climate risk.

There are important developments in the EU and in Switzerland in terms of policy, financial regulation and business practice in relation to the alignment of financial portfolios to the climate targets. What are the implications for the climate-finance sector? We ask to Stan Dupre (2 Degrees Investing Initiative), coordinator of the SEI Metrics project, delivering methodologies to assess the alignment of investors portfolio to the 2C benchmark.

There are also important developments in the EU, and, more broadly, in the area of investments in green infrastructures and social innovation projects (the Junker Plan). What are the implications for social responsible investors and impact investing? We ask to Filippo Addarii (Plus Value) an expert of EU research in social innovation with in-depth knowledge of the inner working of EU policy.

In the backdrop of the aforementioned developments, a transition to a low-carbon economy could be in the making in the EU. However, until this scenario does not fully materialize, there is uncertainty about which pathway will be taken. This is a problem for business and in particular for the sustainable finance sector. What does standard economic theory have to offer to understand and manage this transition? Is traditional finance well suited to deliver sustainable finance metrics and models? What does the new research in economics and finance rooted in system thinking and complexity has to offer on this? We ask Carlo Jaeger (Global Climate Forum), coordinator of CoeGSS and former coordinator of many EU research projects aiming at providing policy insights.

There is growing interest among policy makers and economic analysts for alternative models able to account for characteristics of economic agents such as learning, interaction and asymmetry of information. Why is that? In particular, why is it important for the public and private financial sector to understand the role of technical change in economics and in the transition to a low-carbon pathway? We ask Giovanni Dosi (Sant’Anna School of Advanced Studies), coordinator of the ISIGrowth project, that delivers insights and tools to assess policies on innovation and economic growth.

Progress towards sustainability requires that the economy to be more local and more circular. Much of the low-carbon transformation will entail a digital transformation of many economic activities, in particular in the cities. Indeed, many of these developments will change the way how people live and work in the cities. Finance will have a crucial role to play. What kind of research do we need to manage this transformation? We will hear from Guido Caldarelli (IMT Lucca), former coordinator of several research projects on complexity and systemic risk, leader of the FET Flagship initiative Data4Society.

Further, we discuss with all the panelists the following points.

The ability to explore solutions and transfer knowledge is a precious public good that all actors in sustainable finance will benefit from. Currently, this is not well understood by national politics. Moreover, traditional research in finance departments has often a too narrow vision of sustainability and lacks the conceptual framework needed for the discipline to progress. In contrast, there is need for interdisciplinary, innovative, out of the box research, willing to deal with complexity of reality and incomplete data.

The following questions arise: In order for the Sustainable Finance sector to develop in a sustainable way, what kind of research do we need and why? Why do we need public and independent research on Sustainable Finance? Is traditional finance well suited to deliver sustainable finance metrics and models? Why do we need to see the classification of sustainable assets as a dynamic process, co-designed with the input of all scientific disciplines related to sustainability? What could it be the benefit of a EU-level data infrastructure on Sustainable Finance?

The SIMPOL Project is currently funded by the H2020 European grant DOLFINS (no. 640772) in the Global Systems Science area of the Future Emerging Technologies program.