How sustainable finance can drive manufacturing growth in Europe - Alfred Sant

When we look forward to the development of sustainable finance, not least with respect to manufacturing, we should be aware that we have a very long road before us, Labour MEP Alfred Sant said.

Addressing a conference organised by the European Forum for Manufacturing at the European Parliament in Brussels, Sant said that sustainability has been on the agenda of many companies in the EU, but it has mainly been unrelated from their core strategy. Moreover, it seems that companies take a fragmented and reactive approach - ad hoc initiatives to enhance their green "reputation" or deal with emergencies - rather than dealing with sustainability as an issue that has a direct impact on business results.

Our financial markets are structured to reflect return on investment that responds to quantifiable and well recognised cost and price indicators.

"Developments like climate change which are likely to happen well beyond the timeframe set for the value added of an investment qualify as an act of God if they become effective during the investment's lifetime. That can best be countered prudentially by buying insurance to guard against its occurrence," he said.

Though this can be labelled short termism, it is the rational way by which the financial and productive systems operate under neo-liberal rules, with prices serving as signals to communicate to economic players how inputs can be converted to outputs at enterprise level, while leaving a financial surplus.

It is true that there is a growing market in which investors prioritise environmental concerns and put their wallets on the line.

Still it is relatively a small market and in no way can it be said to have sufficient momentum to by itself help counter the emerging disasters that are foreseen, unless corrective action is taken.

There is only one way by which to achieve truly effective corrective action, Sant said.

Business firms among others must begin to take into account future environmental damage as an operational concern of today. For this to happen, such damage must be converted into an ongoing current day cost that firms will have to internalise.

Which is why public policy measures, at national or EU, level need to be applied.

The Commission has given a good start to this process with the follow up it is carrying out to the first conclusions of its expert working group on sustainable finance: the goal is to make sure that more businesses will have to take a long-term strategic view of sustainability and build it into their strategies to drive returns on capital, growth and risk management.

The ground is being laid for corrective action to be organized in a focused, step by step manner.

"However -- I may be wrong but -- the impression being given is that this focus is too concentrated on the bigger utilities and productive firms," Sant said.

Yet a huge proportion of manufacturing output in Europe is turned out by small and medium size enterprises.

Could it be that the strategy being followed is based on the assumption that measures which are geared towards sustainability in the bigger enterprises will ultimately percolate down to SMEs since many of the latter function as suppliers to the larger conglomerates?

"In my view, it would be a mistake to go down this path. Strategies to promote sustainable finance for manufacturing should specifically also target SMEs," Sant said.

When designing "incentives" and "penalties" in order to create a framework for sustainable finance to thrive, it will be necessary to adopt a graduated approach. Any big bang scenario does not make sense. The "one-size-fits-all" approach should also be avoided because what would work for big or listed companies doesn't necessarily works for SMEs. This isnot made clear in my view in the road map that the European Commission has been pursuing.

On such a basis, it would seem that any scenario being adopted in the future would eventually take the form of "cost penalties" increasing progressively over the years to their full level; while at the same time incentives would be degressively lowered from the initial high point at which they are set.  

This would allow firms to alter and improve their production systems according to a plan within a framework that would remain recognizable to the one in which they now operate.

There is no reason why such an approach would not be applicable to European SMEs right from the start.

Many SMEs finance their growth and investment plans through bank loans, cash flow and suppliers' credit.

The experience with EFSI has shown that European investment platforms can accommodate substructures that cater for manufacturing SMEs to promote new investment projects.

The same could apply for focussed efforts to bring manufacturing SMEs into mainstream exercises to mobilise sustainable finance.

While the penalty system would apply for all relevant inputs no matter who uses them, whether large conglomerate or SMEs, incentives would be tailor made for SMEs, through specific green platforms that provide support by way of cheaper long term finance backed by green bonds or similar instruments.

"The point I'm trying to make is that SMEs should be considered as of now, as main participants in any future scheme to promote and run sustainable finance in Europe," Sant said.


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