2. Overarching Challenges

In turn, many investors are willing to pay for green cash-flows, which may, from a theoretical perspective, result in an asset price bubble, if a lot of capital seeks few green investments. At the same time, uncertainty abounds as to whether specific cash flows are truly green.78 A large number of issuers and intermediaries pretend to act sustainably but major questions arise when the relevant business models are examined.79

One response for these uncertainties is greenwashing (or green dyeing), a marketing and communications strategy that seeks to manipulate the image of the company rather than address the substance of its problematic business practices.

E) INFRASTRUCTURE

Building foundational inclusive infrastructure requires long-term certainty as to the conditions for investing in, and benefiting from, the infrastructure. Furthermore, payment infrastructure must evolve, and legacy systems potentially replaced, to allow for additional consideration of sustainability risk and sustainability factors in all financial transactions. Finally, regulators must look for adequate technical solutions where market forces lead to undesirable results, such as the information oligopoly of sustainability rating providers.

F) DATA & MODELS

The main issues regarding data and models include: > data availability, particularly a lack of structured data, and permissiveness of using estimates > making use of existing data, including data models and rating models employed by existing rating and index providers > the impact and success measurement of the approach used

While additional approaches to data generation based on e-invoicing and payment transactions are also seen, these are only practical for some AFI member institutions.

Additionally, significant difficulties exist with regard to output measurement. This is often due to the multicausality of environmental factors and the lack of regulatory expertise in conducting multi-factor analysis necessary for proper output measurement.

2. OVERARCHING CHALLENGES

The realization of all six Building Blocks of an IGF System faces five fundamental challenges: 1. Staff qualification, as expertise goes beyond financial and regulatory knowledge. 2. Lack of capacity and human resources across the economy, financial industry and regulators. 3. Ensuring long-term political and financial support across all institutions. 4. At least initially, dependency on advisors and institutions less familiar with financial regulation and banking principles. 5. Particularly for individuals and MSMEs, the international discussion regarding what level of granularity is feasible is still ongoing. The uncertainty extends to the adequacy and proportionality of all regulatory tools. Besides the insight that approaches which are too costly are harmful for this client segment (which is potentially financially excluded anyway), while passivity is equally harmful, there is very little certainty as to what works and what does not for this segment. The answer to this question will be country-specific, needs to consider the prevailing methods of finance for these clients, and depends on the level of datafication of the clients.

In turn, we encourage regulators to engage in experimentation and peer-learning from countries with similar priorities and economic conditions.

All in all, experience shows that any IGF framework requires a very dynamic regulator with devoted expert resources and a strong role in shaping the regulatory framework. Depending on how ambitious the roadmap is, and the need to harmonize with other national and international frameworks, a Roadmap to IGF may consume a certain degree of regulatory capital. For instance, between 2018 and 2022, the Luxembourg CSSF – the main regulator for Luxembourg’s investment fund industry – issued more than 70 supervisory documents including guidelines, studies, fact finding exercises and interpretative releases.80

78 M. de Haan, L. Dam and B. Scholtens. 2012. “The Drivers of the

Relationship Between Corporate Environmental Performance and Stock

Market Returns.” 1, Journal of Sustainable Finance & Investment 338, 362. 79 See Greenwashing Ekkenga and Posch. WM 2021. 205; Kaustia/Yu,

Greenwashing in mutual funds. Available at: https://papers.ssrn.com/ sol3/papers.cfm?abstract_id=3934004; Kropf, WM 2020, 1103; Möllers,

ZHR 185. 2021. 881 (896 et seq., 901 et seq.); Veil, WM 2020, 1093; on the legal policy discussion Hirte/Frohmann, FS Windbichler, 2020, S. 1335 (1345); and on liability issues Chatzinerantzis, Hohm, DB Beilage 2021, Nr 2, S. 9 et seq. 80 Source: CSSF website, available at: https://www.cssf.lu; research provided by the ADA Chair in Financial Law (Inclusive Finance).