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Sustainable Finance and the Role of Regulation

Sustainable Finance is top of mind for Nordic investor’s these days, as the most conscientious, seek opportunities to do good with their money.

We sat down with Theodor Christensen, Head of Sustainability for the Danish FSA to get an expert grip on the basics, laying a foundation for understanding, sustainability, net zero, regulation, competitiveness, and the role that fintech plays in marrying these ideas to the capital flows behind the things that we buy.

Theodor, tell us about your role and how sustainability relates to financial services.

I head the sustainable finance team in the Danish financial supervisory authority. A lot of regulation, that is coming into force, affects the whole financial sector in Europe, and we wanted to take a broad perspective, looking across the different parts of the financial sector to ensure we work in a harmonized way with this new agenda.

We hear a lot about sustainability, but we only get to hear the soundbites in the media. Could you tell us, what is sustainability and why it is important for society?

We have to look at the two universally agreed landmark agreements: the UN Sustainable Development Goals and the Paris Agreement. These two speak fundamentally about people and planet, and form the basis for a more sustainable, just, and safe world. We need to develop a system that lifts people out of poverty and gives them access to services that let them prosper and develop. At the same time, we need an economic model that considers climate change without limiting our ability to prosper as a human race, so we have a planet that is inhabitable for future generations. Any long term sustainable global solution needs to look at the societal impact of the policies that we are developing.

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We often hear the term “net zero” in relation to sustainability, can you explain to us what “net zero” means?

Science tells us that the world is warming in proportion to the level of CO2 emissions on a one-to-one scale. To stabilize global warming, we need to stop emitting CO2. In some sectors, some industrial processes will be very difficult to fully decarbonize in the coming decades. To stabilize the climate and stop more CO2 from getting into the atmosphere we also need to take CO2 out of the atmosphere. Net zero basically means that we are taking out as much CO2 from the atmosphere as we’re putting into it.

What are some of the most important tools that you have as a regulator to support companies on their sustainability journeys?

From January this year the taxonomy regulation went into force. The taxonomy is a scientifically based framework for deciding what are environmentally and climate related sustainable activities. We are supervising how the financial sector aligns to the taxonomy. But it goes beyond the financial sector. The EU taxonomy is a tool to look closely and honestly at how well we are doing. None of the main sectors in today’s world are sustainable to a very large extent, so everything needs to change in the coming decades.

Why do we need sustainability regulation, isn’t most of what we are discussing a matter of civil duty and sound business sense?

Most people are aware of these challenges and are adapting their behavior and their consumption patterns. However, it cannot rely soley on individual action, we need systemic change. The term personal carbon footprint was coined by BP Oil back in 2005. BP has been trying to make individuals responsible while at the same time they continue to sell fossil fuels. If you’re an ordinary investor it can be very difficult to figure out what is truly sustainable and what is just marketing. We need to move to a completely different mindset and then we need regulation to tell us what is in and what is out.

How can fintech help develop more sustainable business practices?

First with the availability and crunching of data. A common problem for the financial sector is lack of timely, adequate and reliable data. We don’t have the necessary data streams yet to make effective timely investments. Data collection, aggregation of data, support for the crunching of data, are obvious areas where fintech can play a role. Secondly, the democratization of financial markets also plays a role in helping people understand what they are investing in, which is very helpful, as it strengthens investor’s ability to have a conversation and to decide what they want to invest in.

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Are you optimistic about the future?

I’m a cautious optimist. These are extremely important and hard to solve questions. But change needs to start somewhere. Denmark has a tiny fraction of the global CO2 emissions, but what we do matters. If we can have economic growth and sharply decarbonize our entire economy, including hard to abate sectors, we can be an inspiration for others. The solutions that we find here can be exported and used in other places to leapfrog technologies. The developing world doesn’t need to go through all the technological steps that we did. They don’t need to experiment with windmills, solar, or energy efficiency for 40 years. They can just take the latest technology. Obviously, we need the major economies and most heavy polluters to come around. Europe accounts for only 8-9% of global CO2 emissions. We need the other 90%. Solutions need to scale up and they need to be global but there’s no contradiction between moving at a fast pace in a small country and having global ambitions.

Let there be no doubt, there are huge challenges ahead, but if we all come together and work to put our minds to this, we can change the way we live our lives and the way we emit CO2 into the atmosphere. I think it is possible and there’s still hope, absolutely.

Ditte Dyhr
Ditte Dyhr
Ditte is the Co-founder of Nordic Fintech Magazine and head of Product.
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