António Baldaque da Silva, Executive Director of the Center for Sustainable Business at Católica, tells ECO that although the ESG acronym is now taboo, capital continues to flow into the energy transition.
“Europe has no chance.” The statement from António Baldaque da Silva, Executive Director of the Center for Sustainable Business at Católica Lisbon School of Economics and Business, may sound dramatic, but it reflects the current sustainability economy. The Old Continent finds itself caught between two ships drifting apart – the United States and China – “and Europe is with one foot on each boat.”
Baldaque da Silva, former Managing Director at BlackRock–, the world’s largest asset manager, based in New York and London, and founder and director of its Sustainability Lab, explains to ECO that Europe has a big brother: “the larger China, which has already taken over the space,” so “we will have to find a way for the transition not just to be about buying things from China, but to turn it into a strategic opportunity.”
In an interview during the first edition of Lisbon Sustainability Week, organized by Católica in partnership with the Santander Foundation, Baldaque da Silva acknowledges that the major asset managers “have been completely conditioned by political stances,” specifically a Trump administration that “is against” the energy transition, causing them to reject the ESG label, yet he emphasizes they continue to invest in the transition.
There was an ESG boom starting in 2016. The first green debt issuances, Larry Fink’s letter committing BlackRock, huge capital inflows–then stagnation. Now the data shows a retreat. The first quarter, according to Morningstar, was the worst ever globally in terms of net negative flows. What explains this leak?
It’s partly market maturation. In that first wave there was much goodwill, but even among those aiming to work on sustainable finance, there was scant objective information. Plenty of data, but it wasn’t comparable, was easily manipulated, mostly voluntary disclosures–so there was confusion. Now we see some retreat, but I’d call it cyclical. And there’s a deeper issue at play: our economic growth and development approach isn’t sustainable. That’s independent of ESG or financial markets. We can say whatever, but the problem is real. It’s a wall we’re speeding towards. Sure, we may have stepped harder on the accelerator, but the problem remains, and financial markets will be part of the solution. I believe things are being reimagined and restructured. If you look at actions, and not words, large asset managers and global companies are heavily focused on infrastructure and adapting to climate change. Much private capital targets various transition areas. Investment in green energy has doubled in two years. So, the money is still there, but we needed to settle the dust, determine what’s credible, what isn’t, what indicates real commitment and what doesn’t.
Several promises were made, like BlackRock and others said they’d self-impose rules, avoid investing in coal-dependent firms. Some, including BlackRock, have backtracked. What signal does this send? That we shouldn’t kill the ESG label, but we should continue investing in it?
Absolutely. That’s clear. There’s a political aspect, we are talking about these big asset managers who are extremely influenced by political positions, and ESG is no longer publicly discussed, that’s undeniable. But that isn’t the core issue. The focus should be on where the money is going. Yes, there’s been a retreat, undoubtedly, but sometimes you must step back to move forward with integrity and certainty. Now, I think there has also been another setback. There is a very big dream in net zero, there is a very big dream in 1.5 degrees [under the Paris Agreement], "and those 1.5 degrees, probably, or very probably, we are already there. And so there is also a need for people to think "Wait. What did I really promise and what makes sense? What, in this new setback, or in this new situation, which may take three, four, five years, who knows, what makes sense for me to commit to or not?"
Is it a wait-and-see approach?
More like a pullback, a return to basics. However, I would say that, for example, big asset managers leaving alliances and making promises doesn’t mean they don’t know where the good investments are. They’re still investing heavily in green energy, and global investment has risen significantly. But, their tone and framing are more cautious, yes.
As you said, partly in response to a change in the political context. We have a new Trump administration, with more power than the first, and which is vocally opposed to, or less in favor of, renewable energy.
It’s not just less supportive; it’s against. Yes, against.
For example, he has already said no to offshore wind farms. We will see what happens with the IRA [Inflation Reduction Act], but he has always spoken badly of Joe Biden's IRA.
He’s trying to forbid companies from using or reporting ESG.
Like on diversity?
Yes, absolutely opposed, not just neutral.
What does that mean for projects in two senses? First, projects in the US and America’s role as the world's biggest economy in the energy transition. Second, what signal does that send to global counterparts, like big asset managers or companies such as EDP, who are watching to see what happens?
We must separate the issues. There’s no doubt that those projects relying on US subsidies will lose them. It was binary: subsidies existed; now they don’t. Was is productive or was it lucrative? Maybe, they stopped. Which means that these projects will stop, will be abandoned, or will be repurposed. But then we must reframe the problem: what is it, and how do we solve it? The truth is that the United States is probably the only one of the major world powers, when I say Europe, China, and the United States, that has oil and gas. And so, for them, it makes sense, if we take sustainability out of the equation, to want to direct their global energy hegemony through what they have. Europe and China do not have these resources. Therefore, Europe and China will make a faster transition. What will happen, and I think it's a shot in the foot for the United States, as in many other areas, Trump is being, what will happen is that if you leave some space for whom? For China. China is undoubtedly the country that pollutes the most, but it is undoubtedly the country that is investing the most in green and renewable energies.
They’ve got the whole manufacturing chain.
The US is shooting themselves in the foot, losing competitiveness in the space that will dominate the future. Fossil fuels may still be needed, but they won’t dominate the energy future.
But, on the other hand, the United States have a very dynamic economy, which, for example, is by far the world leader in technology and needs gigantic data centers for energy-intensive artificial intelligence projects. Do you think these Silicon Valley companies are stakeholders in this energy transition and could force some mitigation on the part of the administration?
There is no doubt that this is not good news for them. Some of these technologies are the ones that are sustaining the voluntary carbon market. Therefore, on a completely voluntary basis, they are paying above-market prices for technologies that are still in their infancy. They are clearly already helping the market to make the transition. Now, they are not going to oppose Trump, but, for example, they are talking about things like atomic energy and other energies that can compensate. There is no getting around the fact that these technology industries are not suddenly going to convert to fossil fuels, at least not on a large scale. So, they are going with some science because of the political slant. But as I was saying, they are large organizations, they are elephants in the room and they have to be careful, but then maybe it will be a little less noticeable, but they will definitely continue to invest heavily in the energy transition, perhaps through what they do in other countries, because as I say, the energy transition is not an ideological thing, it is happening, and it will continue to happen. And so, it's just a matter of understanding which side and with what competitive advantage you want to approach this transition.
We are talking here about global blocks and the opportunity that China has and is taking advantage of. Let's talk about Europe. In Europe, too, there was a slight decline in the ESG balance in the first quarter. It was the first since Morningstar began tracking this. How do you see the sustainability finance market in Europe? Then there is a second thing, which is the Omnibus, launched in February this year, which brings many changes to ESG rules, but which has received praise for simplification, as well as criticism for being deregulation rather than simplification, with an excessive focus on costs rather than value creation. Here, as in many things, it is always good to assess how Europe is positioning itself to take advantage of opportunities.
Yes, yes. First there is that part, the strategic positioning part. Europe has no choice. Europe has to commit to the transition, without a doubt. Europe is in a somewhat fragile position because even if it commits to the transition, it has a Big Brother, which is greater China, which has already taken over the space, and so we are going to have to find a way for the transition not to be just about buying things from China, but for the transition to be a strategic opportunity for us, which I think is still being thought through in terms of exactly how that is going to happen. Now, regarding the Omnibus, I think Europe tried to take too big a step, and therefore some legislative backtracking makes sense. But that's the problem, the problem is trying to differentiate between simplification and deregulation. We have always been very willing. For example, the target of 1.5% in 2050 is quite prescriptive. It's not saying, I'm going to do these things, I have this goal, and so now I'm going to see how to get there, which is always more complicated with this type of planning, but I understand, it's a goal...
Is it common?
And a commendable goal. Now, we have taken too big a step and are recalibrating. I don't think it will be the final version, precisely because it has led to too much deregulation. But, for example, in competitive terms, it is important to realize that most of the world is very focused on climate change and transition because of the impact or financial materiality it may have. How does this affect companies' accounts? For example, the European Central Bank and others are very attentive to exposure to these types of risks. Europe goes much further and has the concept of double materiality, meaning that Europe wants, and in my opinion rightly so, to try to understand how companies are influencing the communities and the environment in which they operate. Now, this has to be done carefully, and the measure was too draconian in including small and medium-sized companies that have no reporting capacity. We must be careful not to Americanize our principles and objectives. Regulation is one thing, bureaucracy is another.
And in Europe we have been talking about this more and more, and according to players in the renewable energy sector, Portugal is seen as a bad example.
For example, European taxonomy is so technically precise that it is very difficult. It is very difficult for companies to understand, and then it is very difficult for European Commission technicians to keep up to date with these technical aspects that are evolving every day, new technologies, new ways of producing energy, cement, all of that. It is a law that will be very difficult to keep relevant and optimal over time, because it is so specific that as the world moves forward quickly, this specificity will become outdated.
Define it, then implement it, execute it.
And make sure that it evolves over time with technology. The aim is to have a transition. The law also has to make a transition. In terms of bureaucracy, there may be good intentions, but then the law is so complex that it quickly becomes bureaucratic and ceases to make sense, ceases to serve the purpose for which it was created.
Two questions regarding Europe. The first is that we are talking about many opportunities here. In which segments, in which areas do you see opportunities that are suited to the context we have in Europe and that the Chinese, for example, are not doing, or are doing and we can do better?
That's a good question. Because, as I was saying, Europe is a bit stuck here, it seems to be between two boats. And the boats are drifting apart and it has one foot in each boat. There are several things. There's the whole sea-facing side. There's the whole side that's focused on more careful agriculture and more careful biodiversity. There is, of course, the energy sector, where we... with regulated policies and policies where it is sometimes much easier to be a fast follower than a pioneer. All these areas, probably in areas that involve a lot of engineering, are areas where Portugal could invest. We have good conditions for that.
There is an issue that is being discussed daily and that will have to be decided and implemented quickly, and that affects investment and the use of capital. Europe seems to be stepping on the gas in two areas, mainly in Germany, which are infrastructure and defense. Could this hinder the flow of capital for the energy transition?
Absolutely. There isn't enough money for everything. Although some of these things are complementary, if we have a plan to make a transition, for which we know we need roughly 5%, 6%, 7% of GDP, and suddenly there is a concern – which I think is legitimate with regard to defense – obviously in economic terms this will be detrimental and therefore complicated trade-offs have to be made. The economic situation over the next five to ten years is very complicated, so there are no easy solutions, nor is there much money to distribute. I don't think we have to stop one to start the other, because, in fact, these two are almost existential.
And there is a third one, which is digital as well.
There's more. There's demographics, there's public debt, a series of monocrises that lead to a polycrisis. All of them are relevant. These are difficult choices that will have to be made. Saying that we're not going to make the transition now, that we're going to stop because we have to defend ourselves, is not an option. It's no longer possible to stop this ship, and thank goodness for that. Now there will clearly have to be trade-offs. And perhaps what will happen is that the standards of living and the progression of standards of living that we are not used to having in the Western world will perhaps stagnate. Because there are all these other concerns that do not bring benefits in the short term.
Two last questions, one national and one local, because we are here at the event. First, how do you see the sustainable finance market in Portugal? Do you see companies looking to finance sustainability projects? And are there investors who are interested in looking at that? How has it been evolving?
I would divide things into two or three points. There is a lot of operational investment being made, which is almost mundane nowadays. We are talking about company transportation, energy, and companies' energy use, all of that. These operational aspects are extremely important, and there is a lot of investment in them. Banks lend a lot, governments lend a lot, and the Portuguese government has also helped in terms of incentives. I would say that this part is the low-hanging fruit, this part is being done and it is easy. When we are talking about a paradigm shift in a company's business strategy and a complete change in the way companies operate, then I think it is more complex. For now, fewer companies are taking this path. Size is also a constraint. Size, short-term uncertainty, all of that. I'm not saying there aren't any. There are good examples in Portugal of companies making this transition. But this part is much more difficult, both for companies and then for banks. Because on the operational side, it's relatively easy to see what the operational gains will be in the next two, three, four, five years. But on the strategic side, it involves a lot more thought. But that too, and this point is interesting because it reminds me of another part of the European Union's strategy, which I think is spot on, which is to try to develop capital markets in Europe. And this type of strategic change of plan, or of the company's strategic plan, or even of new companies with plans that are very focused on sustainability, is usually done in private markets, with venture capital, with private equity, all of which is still very incipient in Europe. More support in these areas, more incentives could be a good way to make this strategic leap that we have to make. With one caveat. It is very easy to have good ideas, but it is very difficult to have a strategic plan that will make money in three or five years. Especially when you are thinking about public money, it is very important not to confuse one thing with another.
We are in the first Lisbon Sustainability Week. What is the concept and how is it going?
First, to answer the second question, I think it is going very well. The quality of the event, the quality of the content, and the operational quality, which is also important, of the event is going very well. The idea of the Center for Sustainable Finance is relatively simple: it is to think about the role of finance as a catalyst for transition. It is not just an energy transition, it is a more global transition to a more sustainable world. And for us, there are three fundamental axes, which are exactly the three axes of our work in our first year and the three axes that can also be seen in this conference. First, everything has to be led by good science. And so, while we are here talking [on Wednesday], there are probably 20 or 30 university professors from around the world, Harvard, MIT, Stanford, LSE, in a room there, discussing academic papers on sustainability finance. We were talking about ESG, and it is very, very important that academia also says a little about what can be seen in the data, what is relevant, what is informative, and what is noise. For us, from the beginning, this academic aspect has always been very important. The second part was talking to people. The transition will happen because we, as citizens, want it to continue. As citizens who are consumers, citizens who are workers, citizens who are going to vote. And so, for us, it's very simple: it's about opening up some of these concepts to society at large. Yesterday we had masterclasses for beginners, for those who know nothing about biodiversity and climate models. Today, as we speak, we had a very good one on carbon markets and biodiversity markets, and now we are watching one on how to incorporate climate change and climate models into financial analysis. So this is the second component, which is very much aimed at ordinary people. We, simple citizens, but it is something very important for the Center and also very important for our founders, the Santander Foundation.