The Political Economy of Green Financial Regulation
Sustainable finance regulation will play a central role in the decarbonisation of the economy and the reduction of emissions. The international harmonisation of regulatory standards can be a powerful tool to promote transition, but also advance economic and geopolitical interests.
The creation of international standards for sustainable finance could therefore become a contested battle, one where European, American and Chinese interests may create frictions.
- The return of the US to the international financial regulatory discussion is upsetting an area where the EU had asserted some leadership and established cooperation with China.
- The US remains relatively ambiguous about the balancing role of taxonomy, reporting rules and sustainability standards. This raises a philosophical question about the role of price signals and markets versus that of prescriptive government regulations to achieve climate transition.
- Emissions transition plans by corporations and stress-testing of climate related risks will soon become a new frontier for corporates, and, for the financial sector, a new terrain for international competition.
This policy brief seeks to clarify the contours of the green regulatory field and take stock of existing initiatives. It looks at the three major approaches to green regulation, explaining the philosophy underpinning each, and the emerging political dynamics between them. These three approaches are:
- Taxonomies – defining what economic activities are sustainable, and/or unsustainable, and/or what activities potentially fall in between
- Disclosure rules – transparency, flexibility and market-driven adjustments in sustainability frameworks for disclosures
- Sustainability reporting standards – the materiality concept, a potential bridge between a market-driven approach and taxonomies
These approaches are not mutually exclusive. Each of them rests on a different philosophy, but they complement each other by addressing different needs in the sustainability policy space or value chain.
This text was first published on September 3, 2021, by Third Generation Environmentalism (E3G).