There are plenty of sustainable plans nowadays, that is not the issue. The problem is that it is often very difficult to get funding for those plans. At the same time, moreover, there is a lot of greenwashing going on in the financial sector. Billions more are still being spent on the destruction of our living environment than on making it more sustainable. I don’t know about you, but I would not mind if we could somehow avoid a few of the catastrophes that are heading our way.

Solutions for improving the fundability of sustainability efforts and enhancing the ‘green sincerity’ of the financial sector come from diametrically opposed camps. On the one hand there are those who believe that governments should make the real economy more sustainable through laws and regulations, after which capital would automatically follow. So, no more obligations for finance, but money that makes possible what is legally allowed. And then there are those who expect that if the right regulations for the financial sector are in place, the financial sector will be quite capable and willing to make sustainable choices of its own accord: a flywheel for sustainability. That makes life for politicians easier: they just wait until finance helps to achieve net-zero, a circular economy or restoring biodiversity. Both ways don't work in isolation. I believe it will only work if you do both.

Financial sector regulation is now mainly aimed at making it more difficult to channel money in the wrong direction. Doing less bad instead of doing good. Europe has already made great strides in this respect, as evidenced by an avalanche of new abbreviations (SFDR, Taxonomy, etc.). This is supposed to ensure that sustainability risks are considered more thoroughly during investment decisions and that greenwashing is prevented. Useful, but despite all those regulations it is still not prohibited to fund unsustainable activities.

The flywheel will, however, not start spinning until something is done about the real economy: pricing, setting standards, prohibiting. If the real economy is regulated, non-sustainable companies do not change their business practices, they will price themselves out of the market and it will become easier for sustainable companies to obtain funding. This will automatically cause huge capital flows to shift.

But there is one small problem: we are not yet seeing nearly enough of these types of policy measures. Due to grumbling and foot-dragging, the economy just muddles on unsustainably - and therefore continues to be funded that way.

Of course, it is always a good idea to call on the moral compass of lenders. Something may well be allowed, but that does not necessarily mean that you should do it. But morality and the financial sector is historically not the best combination. As long as something is allowed, there will always be someone who will grab the money off the table. So, dear politicians, it is an illusion to think that the financial sector will achieve what politics is failing to do. The financial flywheel will not really start spinning until the real economy is also given a sharp sustainability push. And that really needs to be organised in Europe’s capital cities and in Brussels.

This is a translation of Hans Stegeman's column in Het Financieele Dagblad, published 5 July 2022.