Author: Anna Poliakova
This article is an opinion of the author. Please give your comments, as I would like to learn.
I am convinced that the new ESG taxonomy regulation from the EU is not created with sustainability in mind. The real reason behind this regulation is to combat the new cryptocurrency and stablecoin payment technology, because the public services in developed countries cannot forbid it. Reason being that the authorities want to save the traditional financial institutions. And the only way to create credible sustainability reporting (taxonomy) is to implement the new blockchain technologies within traditional banks.
The good news is that the environment will benefit from the new taxonomy, but this is a side effect. Authorities do not really care about the environment. We are just lucky that the governments have a new competitor in the emerging cryptocurrencies, f.ex. bitcoin.
Another reason why I do not believe that the taxonomy had sustainability in mind, is the fact that the taxonomy has been introduced in 2021, a late start as far as the environmental crisis is concerned. We have known for a century that carbon emissions cause a rise in temperatures, and since the 1980’s this has been high on the agenda around the world.
It is widely announced that the EU will need enormous amounts of money to invest in sustainability over the coming decades, and that the taxonomy should bring money from private investors through increased focus on these investments. Allegedly, the EU needs help from private investors to finance the transition. (The taxonomy by the way may raise the risk of a bubble in sustainability investments, which is a problem in itself.)
But wait. What about corona? The EU countries have paid for it through stimulus packages, which are financed through sovereign bonds (basically selling bonds to private investors). So during corona the EU took responsibility for the matter. But environment is a more important crisis than corona (maybe it even caused corona in the first place). And here it is as if regulation is needed to channel private funds? Not to mention that the EU countries bailed out financial institutions during the housing crisis. In other words, the EU follows the Keynesian economics only in cases of acute crises, not when it is really required, as in the case of a threat to the planet.
If the public authorities really cared about the environment, they would have addressed the reason for the pollution – it is rewarded financially to be an unethical business. How is that, would you ask? Traditional accounting favors the cheapest production resources, and not the optimal use of resources. Furthermore the established accounting systems only record financial indicators (f.ex. profit, share price etc.). If normative accounting had been used, the contingent liabilities would treat sustainability as part of the equity, and not as an expense which penalises the business.
You might say that there already exist non-financial reporting standards of various sorts. Correct, but they are not a part of the established accounting system, and thus bear no consequences if they are inaccurate, or worse – misleading. After all there exist thousands of laws guarding investors’ money (accounting code). Even if a company wants to act ethically, the company is doing something illegal, theoretically speaking, because the legal practice puts profits above any other objective. This is simply how a company is defined in the law. And until the definition of a company changes, any other changes will have only superficial effect. When money talks, everybody listens. A company could be redefined as an entity who’s goal is to satisfy a need, f.ex. produce a product. This would shift the focus from profits only. But this is utopia, as the accounting code and company code will never be changed – it is bad for business. And by the way, the taxonomy points in the same direction, because it is only a disclosure regulation, not a descriptive regulation telling companies and investors how they should allocate their funds.
Here we come back to blockchain technology, which is essentially a ledger. A ledger is accounting. Here it is possible not only to record financial figures as in traditional accounting, but also many other variables, f.ex. sustainability indexes, as defined by the taxonomy. The data are traceable, which means that you know where it originates, and nobody can cook the numbers. It becomes really interesting how through this technology we finally have a reliable way to produce data on sustainability. (Sorry to all you auditors out there, you may go out of business.) As mentioned, traditional accounting does not want to incorporate contingent liabilities, even if data is reliable, which it often is not.
So by introducing the taxonomy the authorities are nudging the traditional banks and other financial institutions to implement internal blockchain technology, as this is the only way they can supply good quality data on sustainability. Internal blockchain creates a competition against cryptocurrencies, as the first is controlled by the regulation (authorities). (Not to mention that internal blockchain has the potential for serious GDPR breaches and control of law-abiding citizens, but this is another topic).
Here you might say that cryptocurrency is a large consumer of energy, and how can it then be sustainable? Bitcoin does indeed consume more energy than some small nations, but that is besides the point. Cryptocurrencies are threatening the whole traditional system of banking/debt and government, in essence threatening the taxation system. Has nothing to do with the environment. It is purely an accident that the job of combating cryptocurrencies was placed on sustainability regulations. It is designed like that so that it would make sense to citizens, and the government actions would have support both from the person in the street as well as from experienced investors. Everybody wants to be green, right.
By protecting the traditional financial institutions and national central banks, the authorities protect the way the money is created in the economy. Traditional banking creates money when debt is issued, and the rich get richer by simply using debt, which is as far away from anything sustainable, as you can get. Inflation eats away your savings, not to mention that the system is prone to regular financial crises.
In bitcoin for example, the money supply is fixed and is not created through debt. It will not have price increases due to inflation (after it has stabilised of course).
An expert I talked to said that the energy consumption of the Bitcoin Blockchain delivers a well-suiting reason to tighten regulation. Moreover, you see governmental bodies such as the European Central Bank expanding their mandate using ESG (sustainability) as an argument. So he believes ESG is not truly at the heart of the ones in power, but it is a welcome reason to regulate and control using an argument acceptable to society.
I myself am not defending cryptocurrencies. This article is just to illustrate that the taxonomy is a great initiative, as it will benefit the environment, but not for the reasons most of us think.
Please comment your opinion on the matter.
#sfdr, #taxonomy, #stablecoin, #impactinvesting, #sustainability, #financialsystem