This article is part of our special report Sustainable finance: Going green’s crucial ingredient.
Italy’s former finance minister Domenico Siniscalco insists that sustainable finance is going from strength to strength and that it will hold the key to effectively combating climate change. He also believes that Italy’s new Commissioner, Paolo Gentiloni, will play a crucial role.
Domenico Siniscalco served as Italy’s finance minister between 2004 and 2005. An economist by profession, he also was a lead author on the Intergovernmental Panel on Climate Change’s 2001 report and is now vice-chairman of Morgan Stanley.
He spoke with EURACTIV’s Sam Morgan.
Public awareness of climate change has made a quantum leap since you started working on the subject in 1989. Do you think that the way business is conducted has made a similarly large step?
I believe that after many years where climate change was treated top-down by governments and movements, with few results, the landscape for business is now changing dramatically in a market direction. It’s been propelled by three major fundamental changes, the first of which is a change in preferences. Young people in particular, as well as people in business care now, when it comes to environmental liabilities. You can see and touch this change everywhere you go because if reform is not owned by the general public, it will never happen.
The second point is technology. We’re witnessing a wave of tech that is revolving around electrification and renewables in power production. Firms involved in that are trading much better than traditional utilities. Once you have a growing percentage of clean electricity then you must electrify whatever you can. It’s already happening. In transport, it’s shifting rapidly towards electricity and, surprisingly, in a good way, China is ahead of everyone else. There’ll be a minor share of heavy industry still relying on fossil fuels but all other productions can shift towards electricity. In Italy, a manufacturing champion with a lot of SMEs, this is going to be particularly successful.
The third leg of this big change is finance. There are today $31 trillion in sustainable assets, which has grown by 34% over the last three years. It’s amazing how things have changed. We have the ingredients for a fundamental shift.
How big a catalyst has the Paris Agreement been in all this?
I see decarbonisation and climate action as a trend, where there are milestones. Kyoto is one, Paris is another. None of them is decisive, as it’s a continuous process of change in technology, finance and preferences. Nothing against Paris, it was good but don’t give it too much credit because it’s a long path. Climate action After trial and error, it’s finally taking on a life of its own.
You were a lead author of the IPCC report in 2001, which got the Nobel Peace Prize in 2007. Last year’s edition has been hailed as a landmark report in terms of spelling out the impact of global warming. Do you have a feeling of ‘told you so’, given you were involved nearly twenty years before?
The great thing about the IPCC is that it helps disseminate and simplify information from numerous sources. When Greta Thunberg says listen to science, the science is the IPCC. Year after year, these reports change. The great merit of it is that the IPCC has pushed back and marginalised climate science denial and negationism, while focusing on costs, benefits and impacts. The most recent reports are interesting because they are thematic, deep dives that are very important. But don’t take them at face value, because science is changing. It is a way of taking stock of research and conveying it. Numbers will change and it’s healthy when they do because research continuously evolves.
The EIB has updated its energy lending policy to largely phase out fossil fuels and increase climate investments. How big a signal is that?
That’s crucial. Whenever you have a big project, you fund it through a pyramid of instruments. Those segments need to be totally consistent with one another, so if you want EIB funding, you must be sustainability compliant, Sustainable Development Goals-compliant. It will drag the whole process of financing in that direction. Italy’s new Commissioner Paolo Gentiloni’s duties in this area will be equally important. Business responds to incentives, so if the demand, EIB, policymakers all go in a certain direction then it will move forward. That said, energy transition must involve all energy sources.
Is the fact that Gentiloni will oversee the SDGs a significant step for this new Commission?
It’s important because if I go back to my days as an adviser to the Italian government and European Commission, then when I was finance minister, it’s pretty obvious that the environment needs to be routed in other policies. The very fact that Paolo is running that portfolio with SDGs is key. I know Paolo very well for being a smart compassionate guy around this topic, we’ve been working on it together throughout the 90s and early 2000s. I can’t think of anyone better to push this agenda forward.
Should the Commission have a Commissioner dedicated solely to the SDGs though?
I do not agree with that. The issue should not be treated separately from economic development, we need to integrate, we need to understand that climate change and, more generally, environmental policy is one dimension of human development. Treated separately, it will always be treated as a “luxury”. Climate and energy are the real dimension of growth.
Diving deeper into the detail. Recent forays into issuing bonds linked to the SDGs have been made. Is that kind of instrument the future of finance?
An Enel SDG bond arranged by Morgan Stanley has attracted a lot of interest in Italy. It is structured like a conditional bond, you are paid a certain rate, if, for example, the firm fails to achieve its renewables target, investors will get paid a higher rate. It’s extremely innovative.
London’s Thames Tideway sewer project is partly financed by green bonds. If more large-scale infrastructure projects like this are financed in a similar way, is that how sustainable finance really takes hold?
Best practices are very important. An avalanche effect with ESG-SDG bonds can improve the landscape dramatically. They incentivise the companies who issue them to comply with their own objectives. The danger we have to watch out for is greenwashing, this pretending to have an environmental approach. We need someone external, a third party to check whether it is legitimate. Sometimes that is made redundant because the results are tangible, like a bigger share of renewable power in the energy mix.
Can those independent checks be carried out by the EU?
It makes sense. But I also believe in private sector ratings
Where is the next big milestone in climate policy, in your opinion?
In my understanding, the political process is like those rivers that go above and below ground. It’s hard to predict how and how fast it will proceed. It’s a bit naive to believe that tragedies like the one we had in Venice recently will change sentiments. I don’t forecast the speed of the process but the direction of change is very very clear.
[Edited by Zoran Radosavljevic]