European sustainable finance

Translated by Annachiara Laino 

When discussing sustainable finance, public attention almost always focuses on its regulations, taxonomy and European “green” bonds. However, what happens within European institutions is increasingly influencing beyond the European Union’s borders. In recent years, the EU has not limited itself to building a more climate-conscious financial market, but has begun exporting its model attempting to make it a shared standard through cooperation with international organizations and partner countries via a quiet and ambitious process.

Sustainable finance, in the language of European institutions, is defined as “finance that supports economic growth while reducing environmental pressures and contributing to the objectives of the European Green Deal”. It is a formula that summarizes the logic of investing not only in green projects but also in changing the direction of capital so that it takes into account environmental, social and governance (ESG) factors. The objective is not moral but economic: to encourage both public and private investors to consider climate risk as a financial risk.

So far, all of this has been within European borders. But how does this paradigm translate when it enters the field of international cooperation? The EU manages a thick network of external financial instruments, such as the Neighbourhood, Development and International Cooperation Instrument – Global Europe, designed to finance development projects, sustainable infrastructure and green transition in partner countries. Through this and other channels, the EU sends billions of euros towards global climate action, but it never does it alone. In order to work, these funds must interact with European and international financial institutions, multilateral banks and global bodies that establish shared rules and standards. 

Here comes into play one of the most interesting and least discussed dimensions: the EU as a global regulatory actor. Its influence does not come only from the money it invests, but from the way it is able to impose its normative vision. It is the ability to influence global rules through the power of its market and legislative system. This is what happens, for example, with the Platform on Sustainable Finance, the group of experts that assists the Commission in defining the technical criteria for sustainable investments. Among its explicit functions, the platform also includes international cooperation, a clear sign of Europe’s intent to lead the global conversation on the issue.

However, exporting rules is never simple, as each partner country has different financial structures, institutions and priorities. In simple terms, what is considered “green” according to European taxonomy may not be considered so in an African or Asian context. In fact, the rigidity of an overly technical standard risks producing exclusion rather than progress. An analysis by the ECDPM think tank states that “the EU has not yet adopted a climate justice perspective outside its borders, but it would have the opportunity to do so by integrating it into its external action”, underlining the need for rules, but also adaptability and sensitivity to the local context.

Another major obstacle is coordination. EU funds and cooperation programs must  integrate with those of international development banks and multilateral organizations operating in the field. The EU attempts to do this through initiatives like the Global Gateway, a €300 billion plan to build sustainable infrastructure in Africa, Asia and Latin America. On paper, it is a European response to the Chinese Belt and Road initiative; in practice, however, the effectiveness of these initiatives will depend on how well European standards can coexist with the rules already adopted by other global actors. Often, rather than harmonization, it is a matter of diplomatic and technical negotiation. 

There are also challenges of credibility and consistency, as, if the Union asks partner countries to comply with strict environmental criteria, it will have to demonstrate that it complies with them within its own borders as well. According to a report by the Center for Global Development, “the EU is the world’s leading provider of climate finance, but it has not yet turned this economic power into a proportionate geopolitical impact”.

It is in this context that international organizations represent a crucial channel through which the EU can multiply the scope of its interventions, share the definition of standards and ensure that resources invested are consistent with global sustainability objectives. Cooperation with the World Bank, the International Platform on Sustainable Finance or UN agencies dedicated to climate issues is what allows the Union to assert its model in a collaborative rather than an imposing manner. At this point, the real obstacle is more political than technical, and the European Union will have to balance its role as a regulatory power that guides others with that of a partner that cooperates on equal terms. Pushing too hard on the former could make European sustainable finance appear as a form of “green imperialism”, while focusing solely on the latter risks diluting the common vision that has made Europe a laboratory for regulatory innovation.

Much of the future of climate multilateralism is at stake in this precarious balance.

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