The Covid recovery, COP26 and the G20 presidency: this is a key time for sustainable finance in Italy

Covid-19 has had a devastating effect on Italy. But, one positive to come out of the tragedy has been a greater awareness of the importance of government policy and civic responsibility, which has ultimately led to its wide-ranging recovery plan.

Funded with €200bn from the EU – almost a third of its total recovery plan – and a further €40bn from the Italian government, it will finance the mass public investment that Italy has desperately lacked for the last 20 years. The focus is on the digital, green and social transitions.

The plan is not without controversy. It is being led by Mario Draghi, former President of the European Central Bank, under a grand coalition including almost all conservative and progressive parties – as you would see in times of a national emergency. Though not what Italians voted for, it’s one of the most qualified governments Italy has ever had. And Draghi, who has assembled a solid team of professionals including former CEO of Vodafone Global Vittorio Colao, jurist Marta Cartabia, and scientists Maria-Cristina Messa and Roberto Cingolani, is well trusted by European institutions and peers to carry this out.

The plan has the potential to completely change the future and risk profile of Italy and make the country attractive again for international investors. But we fear it will miss one key component: bringing the private finance sector along with it too – especially sustainable finance.

On the surface, Italy is making important moves. Its central bank launched a responsible investment charter in July and the country debuted a €8.5bn sovereign green bond in March. Both Intesa Sanpaolo and Unicredit, the two main retail banks, launched lending facilities in the order of billions designed to meet ESG standards.

But Italy’s private investors still take too cautious an approach to sustainable finance. Lending hasn’t been matched by risk capital and without equity, the billions in lending won’t be deployed. There are just a handful of ESG/sustainable/impact investing funds, with the largest holding just €40m. Most Italian asset managers claim to be ‘sustainable’, but there is neither framework nor procedure to hold them accountable or assess their credibility.

And there is hardly any government policy focused on sustainable finance. Italy is almost a decade behind European leaders such as the UK, France, Sweden and the Netherlands. As the EU works on world-leading sustainable finance regulation, member states like Italy should be at the forefront of the process and not just passive recipients.

Now, with this €240bn recovery plan aligned with a sustainable finance/ impact investing agenda, there is an opportunity to fuel the market in Italy. But no one has yet made this link.

This is a structural issue that could be detrimental to the long-term growth of the country if not addressed. Italy is the second largest manufacturing country in the EU (after Germany), meaning the sustainable transition will affect the country massively and could become a boomerang, hindering access to finance and destroying jobs in a country where 90% of companies are SMEs.

These SMEs lack the digital competency and risk capital to really lead on the sustainable transition. The Association for Financial Markets in Europe says Italian SMEs will need €170bn to bounce back after Covid. The public and private sector need to work together on this and foster innovative partnerships. And there are already examples of this in the country.

Milan Innovation District (MIND) is a €5bn project to build a new sustainable city by 2030, funded by the Italian government, Australian real estate and infrastructure investment specialist Lendlease and Canadian Pension Plan Investment.

Designed to be Net Carbon Zero by 2025, MIND will be powered completely by renewable energy, all transport will be public and electric (no private cars will be allowed on site) and construction materials will be low-carbon and renewable. It includes a work programme for offenders housed in the adjacent prison, to give them a better start when released; and MIND partners are raising an impact investing fund for sustainable urban life, and will provide risk capital for innovative SMEs – including social enterprises and benefit corporations.

MIND has the potential to attract the needed risk capital – especially venture capital for new technological solutions incubated and tested there – and by combination with public funding and lending capital to power the recovery and transition to sustainability.

Italy has opportunities to build on this by taking advantage of unique conditions, to ignite sustainable finance in the country and, thanks to its presidency of G20 and co-presidency of COP26, inspire the rest of the world to build back better.

 

Filippo Addarii is co-founder and managing partner of advisory firm PlusValue, which is working on MIND. He advises the European Investment Bank and Intesa Sanpaolo Bank on impact investing.

Flaviano Zandonai is Open Innovation Manager for the Cgm cooperative group, which promotes social enterprises in Italy and across Europe