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Economics

The Brussels Effect on Sustainable Finance

Apr 26, 2021 Kalin Anev Janse and Anu Bradford

The EU's new sustainable finance taxonomy will go a long way toward strengthening Europe's market for green investment. And, as with the EU's data-protection and environmental regulations, the bloc's framework is likely to have a global impact.

NEW YORK – Europe continues to lead the world in climate action. In the last week alone, the European Parliament and Council reached a provisional agreement enshrining in law the objective of reducing greenhouse-gas emissions by 55% by 2030 and reaching net-zero emissions by 2050. And the European Union published its long-awaited “sustainable finance taxonomy” – a move that could become a global standard for green investment and transform capital markets.

In the last half-decade, public, corporate, and investor awareness of environmental, social, and governance (ESG) risks has risen sharply. ESG investments expanded exponentially during the pandemic, and are now one of the world’s fastest-growing asset classes – a trend that is set to continue.

Likewise, the social, green, and sustainability bond market has boomed in recent years. As figure 1 shows, between 2015 and 2019, worldwide issuance increased more than six-fold; last year, total sustainable bond issuance surpassed $1 trillion.

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Kalin Anev Janse

Writing for PS since 2021
1 Commentary

Kalin Anev Janse is Chief Financial Officer at the European Stability Mechanism.

Anu Bradford

Writing for PS since 2013
9 Commentaries

Anu Bradford, Professor of Law and International Organization at Columbia Law School, is the author of the forthcoming Digital Empires: The Global Battle to Regulate Technology (Oxford University Press, 2023).

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David Punabantu Apr 27, 2021

There may well be a fundamental contradiction between the economy and climate change with regards to a sustainable economic system. The question that arises is that is the current economic system unsustainable and hence negatively impacting on climate change?
Will the Amazon jungle survive under the current economic system for example?
The question is how does the current economic system allocate resources? Are the allocation mechanisms flawed in distorting price and hence the flow of resources in certain directions at the expense of other directions which in turn undermine the value placed on resources like the Amazon to be overexploited and thus making climate change and sustainability an issue?
A look at the allocation mechanism through price is clearly outlined in Adam Smith's Supply and Demand Doctrine. This doctrine does have an underlying axiom.
Adam Smith's underlying axiom saw the doctrine place British goods being bought by the British Sterling pounds. If a German wanted British goods they would have to first change their German D-marks into British Sterling pounds and then use the changed British Sterling pounds to buy British goods, while the D-marks used to buy German goods.
This is the protocol observed when a US dollar wants to buy anything from the European Union (EU). The US dollar first has to be changed into a Euro.
However for most developing countries the US dollar directly purchases their commodities without necessarily purchasing the national currency of those commodities first to buy the commodities.
This naturally undermine Adam Smith's Supply and Demand Doctrine and the true value of the US dollar.
A look at this value distortion is clearly seen in the London Metal Exchange.
The the London Metal Exchange that accepts only the Euro, British Sterling pounds, the US dollar, the Japanese Yen and recently the Chinese Yuan Renminbi to buy all the world's base metals. The LME in a single day handle US$10 billion as 85 percent of the world's base metals pass through it. It is fed by the London money markets that handle US$1.5 trillion plus a day. Yet it bans the liquidities of the nation's that supply it with commodities. Then again the LME say in one day can sell 100,000 tons of copper at say US$1000 per ton. Hence the price of US$1000 per ton is based on a supply of 100,000 tons of copper. Yet Country Q may have only contributed 1,000 tons to the 100,000 tons of copper. Thus the US$1,000 per ton is an aggregate price of many copper producers who produce copper at different rates and at different costs and have different ore concentrations. The copper producers have different national currency liquidities hence different values can be assigned to the copper based on each nation's value profile.
As Country Q demands US$1,000 per ton of copper it is stating it produced 100,000 tons which is -99,000 tons (MINUS 99,000 TONS being MINUS IS$99,000,000 and physically US$1,000,000 whose value is also is minus US$99,000,000. The gap is the manifestation of the crisis in value.
Such a price distortion distorts the real value placed on the environment and it's resources. Another similar case is the International Monetary Fund (IMF) fixed cross rate system.
For example the IMF fixed cross rates on the 28th of May 2021 gave the exchange rate between the two trans-Atlantic nations as US$1 equal to £1.2284. When looking at the Euro the value of the US dollar and Sterling pound in Euro respectively is €0.91027 and €1.11826 giving a IMF fixed cross rate of 1.2284 which mimics the exchange rate of the two trans-Atlantic nations of the UK and USA.
The South African Rand shows a similar picture being ZAR17.4053 per US dollar, and ZAR21.3813 per British Sterling pound giving a cross rate when the two figures are divided of 1.2284. Similarly the North Korea Won with KPW165.848 per Sterling pound against KPW135 per US dollar gives a cross rate of 1.2284. South Korea gives a similar picture. KRW1,517.51 per Sterling pound against KRW1,235.32 per US dollar when divided together gives a cross rate of 1.2284. The Japanese Yen shows the same picture with JYP132.25 per Sterling pound and JYP107.65 per US dollar when divided together gives 1.2284. The Canadian dollar also shows the same image being CAD1.69181 per Sterling pound and CAD1.37721 per US dollar that gives a cross rate of 1.2284. The Indian Rupee at INR92.4590 per Sterling pound and INR75.2657 when divided gives 1.2284 which is the exchange rate between the US and UK.
Even the Chinese Renminbi at CNY8.9449 per Sterling pound against CNY7.15910 per US dollars gives a cross rate of 1.2284. Zambia with ZMK22.1715 per Sterling pound against ZMK17.925 per US dollar gives the same picture.
The question that arises from this is does North Korea have exactly in its money markets the same US dollar and Sterling liquidity to equal the cross rates as determined by the IMF? Does Zambia, Canada, Japan, South Korea, China, India to name a few countries have everyday day in and day out the same liquidity of Sterling pounds and US dollars in their money markets to justify the value given to the IMF fixed cross rates.
To create value free floating cross rates are needed whose value is actually based on existing currency liquidities within each country's money as a function of trade.
Such a condition existed as recounted by the IMF managing director Mr. M. Gutt at Harvard University on the 13th February 1948, when he presented a paper entitled The Practical Problem of Exchange Rates.
Then the official direct Sterling-US dollar rate ruling in Britain and the United States is one Sterling pound to US$4, but the Lira-Sterling and Lira-US dollar direct rates are such that the Sterling pound-US dollar cross-rate in Italy is one Sterling pound to US$2.6. (Tew Brain (1967) p.79)
Americans found it cheaper to purchase goods from the UK via Italy until the IMF stepped in and imposed the IMF fixed cross-rate system in favour of the UK and not Italy nor the US.
The IMF fixed cross rate system needs to be replaced with free floating cross rates while following the underlying axioms to Adam Smith's Supply and Demand Doctrine. Only then can issues of a sustainable global economy and placing the correct value on resources can issues of climate change be tackled. As long as issues such as the Amazon rainforest, The Congo basin forest etc are undervalued by the current economic structure then the sustainability of any climate change attempts will be cosmetic.
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The Brussels Effect on Sustainable Finance

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