Europe’s ESG opportunity

Today, more than $40.5 trillion globally is invested according to environmental, social, and governance principles.

By Olivia Grégoire and Bertrand Badré

Published: Tue 16 Feb 2021, 11:34 PM

Finance is evolving in a more sustainable direction, and just in time. Pension funds, insurance companies, and sovereign wealth funds have made multiple commitments on climate change, biodiversity, and economic inclusion. In each case, the aim is to treat finance as a tool, not an end in itself, and to adopt objectives that go well beyond financial returns.

Today, more than $40.5 trillion globally is invested according to environmental, social, and governance principles. But who defines what constitutes an ESG (Environmental, Social, and Governance) investment, and how far can we trust ESG statements issued by corporations? We need a set of genuinely global ESG standards — and Europe can, and should, play a leading role in formulating and implementing them.

Far from being a purely technical matter, assessing firms’ non-financial performance is a deeply political issue. The first step is the choice of indicators to measure a company’s environmental or social performance. Then there is the question of establishing baseline ESG standards that Europe, the United States, or China will require from all firms that want to do business in their market, as well as a frame of reference that will directly influence financial and investment flows.

Designing such indicators is an invaluable instrument for building sovereignty. Europe, in many respects a global leader in the environmental and social domains, should therefore seize the opportunity, and advance the case for a different kind of sovereignty that serves as a launchpad for global initiatives.

Since French President Emmanuel Macron advocated building European sovereignty in a 2017 speech, the European Union’s view on the issue has evolved significantly. Nowadays, member states are far less ambivalent about defending European sovereignty, whether in response to emerging digital monopolies, the economic risks of Brexit, or the public-health threat posed by Covid-19.

To safeguard its model and values, Europe can no longer just respond to events, but needs to be proactive in identifying and initiating measures that will spread beyond its borders. Assessing corporations’ non-financial performance can form part of a more assertive sovereignty that also enables Europe to address equally urgent issues such as climate change, social problems, and shifting geopolitical alignments.

For example, the EU has set itself far-reaching environmental goals, starting with achieving carbon neutrality no later than 2050. To that end, it recently developed a so-called green taxonomy, a standardised classification that enables assessment of the sustainability of 70 economic activities that together account for 93 per cent of the EU’s greenhouse-gas emissions. On the social front, the EU established the Charter of Fundamental Rights in 2000, and in 2017 proclaimed the European Pillar of Social Rights — granting its citizens new and more effective means of ensuring equal access to the labour market, fair working conditions, and increased social protection. And in October 2020, the European Commission proposed an EU directive to ensure adequate minimum wages for workers in member states.

But here, too, Europe is trapping itself in a defensive situation.

With its large and prosperous single market, high savings rate, and powerful financial sector, Europe can potentially influence these standards through what Zaki Laïdi calls “norms over force”. This is the exact opposite of traditional political and military power, or, as Laïdi puts it, the “ability to produce and set up a worldwide mechanism of norms able to structure the world, to curb unruly behaviour from entering players, to offer those who abide by the rules, particularly the less powerful, ample opportunity to make the norms stand against all, including the powerful”.

At a time when Europe is seeking to outgrow its internal political divisions, the EU has an opportunity to reiterate its environmental and social values without requiring member states to support a particular economic model, but rather by simply sticking to a results-based approach.

One of the founding fathers of European integration, Jean Monnet, believed that sovereignty declines when it is entrenched in old patterns. Having designed a sovereignty that differs fundamentally from previously tested governance models, the EU must now demonstrate its vitality by extending its power beyond its single market.

The EU would have a unique opportunity to assert both the singularity and the extent of its sovereignty.

Olivia Grégoire is Minister of State for Social, Solidarity, and Responsible Economy at the French Ministry of Finance. Bertrand Badré, a former managing director of the World Bank, is CEO and Founder of Blue like an Orange Sustainable Capital and the author of Can Finance Save the World?

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