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Towards a sustainable financing framework for the Caribbean

By Dr. Axel Kravatzky

Warning: the opinions presented are those of the author and do not necessarily represent those of the organizations with which he is associated. Comments and feedback that move the regional dialogue forward are welcome at [email protected]

Around the world, governments, investors, businesses and other institutions have begun to realize the urgent need to shift to an environmentally friendly and sustainable society and economy. In the Caribbean, we think we have more pressing needs – food and shelter, for example, in the face of failing economies or increasing stormy seasons – and we don’t understand how sustainable finance could help.

I repeat, sustainable development is defined as development that meets the needs of the present without compromising the ability of future generations to meet theirs. In 2015, UN members agreed on the UN 2030 Agenda, including a set of specific Sustainable Development Goals (SDGs) to be achieved by 2030. The SDGs include environmental dimensions (climate is one) as well as social dimensions.

Currently, the world is not on track to achieve the SDGs by 2030. For developing countries alone, the UN estimates that the funding gap to meet the goals is 2.5 to 3,000 billion dollars a year! The gaps are certainly not limited to developing countries. In the four years before the COVID-19 pandemic, almost a quarter (24%) of the EU working-age population fell at some point below the at-risk-of-poverty threshold.

In 2018, the EU launched a major action plan to channel private capital into financing sustainable growth.

In 2019, the European Commission adopted and in 2020 the European Parliament approved the European Green Deal which obliges the EU to:

• Achieve net zero greenhouse gas (GHG) emissions by 2050

• Decoupling economic growth from resource use;

• Leave no one or place behind.

The OECD (Organization for Economic Co-operation and Development) estimates that it will take an investment of 630 billion dollars per year in the world for the next ten years to have a 66% chance of limiting the increase in temperature at the surface of the earth below 2°C.

It is clear that these transformations and investments require collaboration between governments and the private sectors to mobilize all their capacities.

The European Green Deal investment plan is based on three dimensions:

• Financing: mobilize at least 1,000 billion euros of sustainable investments until 2030. This will be made up of both public and private investments.

• Facilitate: provide incentives to unlock and redirect public and private investment. To do this, the EU provides tools to investors by placing sustainable finance at the heart of the financial system.

• Practical support: the European Commission provides support to public authorities and project promoters.

The four main components of the current EU regulatory framework for sustainable finance are:

1. The Sustainability-Related Disclosures in Financial Services Sector (SFDR) (Regulation 2019/2088 adopted in 2019, in force since March 2021): it obliges financial market entities to publish information on: (i) the identification and prioritization of sustainable development indicators and the main negative impacts on sustainability (PIA); (ii) a description of the PIAs and the actions taken by the entity to address them; (iii) summaries of engagement policies; (iv) compliance with responsible business codes of conduct, internationally recognized standards of due diligence and reporting; and, where applicable, the degree of alignment with the objectives of the Paris Agreement.

2. The EU taxonomy (Regulation 2020/852 adopted in July 2020, in force since January 2022): this is a classification system for environmentally (and in the future socially) sustainable activities. It is the world’s first-ever “green list” – a classification system for activities that can be considered sustainable. This year, the first group of companies must track and report what proportions of OpEx and CapEx are aligned with the taxonomy. Financial market participants (eg asset managers, pension providers) must report what proportion of their investments are aligned with the taxonomy.

3. The proposal for a directive on corporate sustainability reporting (CSRD) (the Commission adopted the proposal for a directive, COM/2021/184, in April 2021) The European Parliament is expected to adopt the directive which amends the requirements existing declarations in 2022; this will replace the Non-Financial Information Directive (NFRD). (Companies must be ready to report on 2023 business activities by 2024.) Currently, approximately 11,600 companies in the EU are required to report under the NFRD. This number will increase to approximately 49,000 under CSRD as it will include all large corporations and companies listed on regulated markets. The information reported must be verified (assured). Reporting requirements will be more detailed, including information (qualitative, quantitative, retrospective and prospective) on the main negative impacts related to the company and its value chain. Strategy, objectives and board roles will be subject to mandatory EU sustainability reporting standards.

4. The proposal for a directive on sustainable corporate governance (SCG) (the Commission adopted the proposal for a directive on 23 February 2022): governing bodies and entities will have to demonstrate that they fulfill their due diligence obligations by with respect to their impact on: (a) human rights, including labor rights; (b) health; (c) climate; and (d) the environment. Companies must prevent, mitigate and take into account potentially negative impacts on sustainable development, as defined by the United Nations Guiding Principles on Business and Human Rights and the OECD Guidelines. Entities will need to identify and act on upstream and downstream risks, and disclose information about their policies, processes, activities, findings, actions taken and results of actions.

Now is the time for Caribbean governments and private sectors to chart their own course towards sustainable development and resilience. Surely this is urgent and necessary work for Caricom? The EU, although a work in progress, can serve as a model framework, and the work already done presents an opportunity to simplify and adapt to our context. There are significant overlaps which require alignment as well as complementarity between these EU regulations. For example, the CSRD is largely focused on the entity as a whole, while the taxonomy is focused on activities, and the SFRD on financial advisors and financial products.

Together, they are transforming the way companies work, their boards, investment flows and the reporting landscape towards the well-being of people and the health of organizations and the planet.

Dr Axel Kravatzky

Dr. Axel Kravatzky is Managing Partner of Syntegra-ESG Inc., Chair of TTBS/TC309 Mirror Committee, Vice Chair of ISO/TC309 Governance of Organizations, and Co-Organizer and Editor of ISO 37000 Governance of Organizations – Orientation. He is currently project manager for ISO 37006 Indicators of Effective Governance.