Nick Robins and Davide Dal Maso*
A new approach to finance is taking hold in Italy, one that connects the drive for sustainability with the underlying needs of the real economy. Cautiously at first, but with increasing confidence, a growing number of political and financial leaders are showing how sustainable finance is becoming part of the country’s strategy for economic renewal.
The roots of this new approach lie in a unique national dialogue launched by the country’s Ministry of Environment (MATTM) just over a year ago in February 2016. For MATTM’s Director-General for Sustainable Development, Francesco La Camera, it was clear that “a deep economic, social and environmental transformation” was needed to deliver both the Sustainable Development Goals and the Paris Agreement on climate change. And this meant “mobilizing financial resources in the trillions not the billions”.
The timing was good. A group of pioneering countries from China to France and the UK had launched a range of initiatives to boost flows of private capital for climate and sustainability. The G20 had also just set up its ‘Green Finance Study Group’, bringing together finance ministries and central banks to work out how to scale up private capital flows to green investments. And the Financial Stability Board had made its first foray into the sustainability arena with its Task Force on Climate-related Financial Disclosures.
What was striking about the dialogue was the way in which key players in Italy’s financial community took responsibility for identifying the way forward. Representatives from leading banks, investors and insurers as well as the stock exchange, regulators and foundations did not just review experience to date, but also pinpointed practical options that could make a real difference in Italy’s specific circumstances.
Along with other countries, Italy has seen a growing commitment by financial institutions to international initiatives such as the Principles for Responsible Investment and the Principles for Sustainable Insurance. It was one of the first developed countries to introduce a disclosure obligation for pension funds on how environmental, social and governance (ESG) concerns are integrated into their investment policies. Italy’s Sustainable and Responsible Investment (SRI) assets under management now account for 6% of Europe’s total. Among G7 stock exchanges, Borsa Italiana has the highest proportion of green revenues from the listed companies on its exchange and has just opened a new segment on its ExtraMOT PRO market dedicated to the issuance of green and social bonds.
For Italy, a key challenge is how to improve access to green finance for the country’s four million small- and medium-sized enterprises (SMEs). The task is two-fold: first, to provide capital to enable SMEs to improve their own sustainability performance (for example, in terms of energy efficiency); and second, to mobilize the investment needed for SMEs to deliver the next generation of products and services for the growing green economy. This means new ways of channelling green lending from banks, but also scaling up promising areas such as impact investing and green fintech. Speaking at the launch of the national dialogue’s results, Italy’s Environment Minister Gian Luca Galletti underscored this point, saying that “our approach to sustainable finance cannot succeed without considering the role of SMEs in our economy.”
Another reality is Italy’s vulnerability to natural hazards, ranging from earthquakes to floods. For the Deputy Governor of Banca d’Italia, Luigi Federico Signorini, the onset of “climate change can exacerbate the natural fragility of our country” bringing “potentially far-reaching consequences for the economy and the financial system”. Banca d’Italia has found that over 15% of households and 18% of local businesses are exposed to flooding risk, and that most are uninsured. Positively, early findings from Banca d’Italia’s analysis suggests that “a reduction in flooding risk is associated with an increase in outstanding loans to SMEs.”
In the end, the dialogue involved well over 100 participants from across the financial system. Its results were launched in Rome in February, symbolically in the Headquarters of the central bank in the presence of Governor Visco. The dialogue’s report pointed to four broad areas where action could be taken. The first was improving the national policy framework to support green finance, for example through the country’s forthcoming Strategy for Sustainable Development. The second area was focusing financial innovation on critical priorities, for example, the untapped energy efficiency opportunity. A third priority was to strengthen disclosure and governance standards (including by investors to their clients). And the fourth priority was to boost awareness and capacity on sustainability among both financial consumers and financial professionals.
The net result of all of this is that sustainable finance cannot be “a footnote or a sideshow” according to Italy’s Economy and Finance Minister Pier Carlo Padoan. Rather it now has to be seen as part of the “wider programme of structural reform of the economy”. For Padoan, this means reforming rules and incentives so that actual financial behaviour is changed and ambitious results can be achieved.
Importantly, the momentum is not stopping with the launch of the dialogue’s findings. To maintain and deepen the momentum, a National Observatory on Sustainable Finance could be established. One of its activities might be to promote the launch of a ‘green finance initiative’ focused on Italy’s priorities. In Milan, Italy’s financial capital, the city authorities are also exploring the role that sustainability could play in its quest to strengthen its position with regard to other European financial centres, such as London, Paris or Frankfurt. Here, the city’s Budget Assessor Roberto Tasca sees “green finance as just one element of the bigger attraction strategy for foreign investment” into Milan, building on its record in the areas of green start-ups and angel investing. Italy is also incorporating green finance into its 2017 presidency of the G7, not surprisingly with a focus on the SME dimension.
Italy’s financial system faces many challenges. What is clear, however, is that green finance is no longer regarded as a constraint. Instead, it offers a way “to restore profitability in the Italian banking sector”, according to Paolo Garonna, secretary-general of the Italian Banking, Insurance and Finance Federation (FEBAF).
* Nick Robins is Co-Director of UN Environment’s Inquiry into the Design of a Sustainable Financial System and Davide Dal Maso is Italy Coordinator for the Inquiry. The Inquiry partnered with Italy’s Ministry of Environment to coordinate the national dialogue on sustainable finance. For more information, see http://unepinquiry.org/publication/financing-the-future/