Q&A Session with Filippo Addarii

Fatemeh: Last year, Ursula von der Leyen said that the EGD was Europe’s “Man on the Moon” moment. Do you agree with that?

Filippo: It’s a really brave public policy. And it’s transformative, because it implies societal transformation at all levels. It also has symbolic value – not only for the EU, but for humanity. It demonstrates where we wants and needs to go. So, yeah, it is similar to putting the first step on the metaphorical moon.

Fatemeh: Can you think of another initiative that resembles such an ambitious endeavour?

Filippo: It’s a bit similar to Germany after the Second World War, in its effort to move on from the past. Also, we shouldn’t forget that today isn’t just about the climate change challenge, we also have COVID and no one was predicting that. We still have to get through this global crisis for which we haven’t seen the real costs yet. We’re still frozen in time, and so the real price is something that we will see when public funding and special regulations stop.

Fatemeh: I am not sure what you mean when you say it is a bit similar to Germany…

Filippo: It’s like the reconstruction of Germany after WWII’s total destruction, because it’s about building an economy from scratch. Which means moving on from the illusions of infinite growth, the irresponsible use of resources, endless consumption and waste, to a new concept of economy that has to deal with affordability of human development on our planet. This translates into the prudent use of resources, moderate consumption, recycling… just to name a few.

A paradigm shift is needed. We need to change what we value, how we invest and how we measure success, as well as the kind of rewards provided.

This requires a huge amount of political will and resources. It ultimately boils down to the commitment and joint action of every public authority, every company, and every citizen to move in that direction. It’s a titanic collective effort.

Fatemeh: Kind of like the construction of the European Union (EU), in its collective dimension?

Filippo: Yes, there are multiple stakeholders all with different interests and capabilities. So it’s a major political adventure, it’s long term, but it’s the only way to transform Europe and take it to the next stage. I’m not a European fundamentalist [but] I’m interested in Europe as an experiment for the rest of the world in terms of integration, collaboration, shared vision for the future [and] the reoccuring challenge of working with people who are fundamentally rather different.

Fatemeh: To come back to your area of expertise, what does the EGD mean for investors in our global economy?

Filippo: There’s no unilateral perspective. For investors, there is a certain initial engagement, because nobody wants to say that they’re against sustainability. Then, there is skepticism about the capacity of the European institutions, [or] any government/ public institution in driving such a mammoth change. There is fear about the costs that such a transition would create.

An opportunity for some. A cost for others

Filippo: The green transition means decreasing the reliance on non-renewable sources of energy, progressively but consistently, so that fossil fuels represent just a tiny minority. This is a challenge for some of the largest energy companies in the world; so is overhauling energy infrastructure.

On a social level, countries in Eastern Europe are still highly dependent on carbon and coal. The green transition means shutting down coal mines, which means entire communities losing jobs. The private sector will adapt if governments provide the right incentives, subsidies, time, and certainty about the process. Interests will be reshaped. We cannot repeat the same mistakes of past conservative governments like Thatcher’s, though. The real challenge lies in economic and social transformation(s). We need to take those people and communities who will lose out in the short run along with us.

Fatemeh: Does the EGD take into account small businesses, too? For instance, SMEs?

Filippo: That’s one of its blind spots. The focus has been on asset managers and publicly listed companies, so far. But 90% of the economy is made up of SMEs.

Fatemeh: It’s the backbone of the European economy.

Filippo: It’s the backbone of the economy!

The risk might be that the European Commission (EC) is designing policies which might only work for “the big guys”, while forgetting “the small guys”. The small guys are the majority. Forgetting them means not only failing to design the framework which helps them transition, it also means not understanding their concerns, their needs, and not providing them with the right motivations and incentives, which puts the whole enterprise at risk.

Fatemeh: Are there any other urgent blind spots you think need to be addressed?

Filippo: The other major blind spot is an implementation plan to engage European authorities. The Green Deal has been designed for governments which have the capacity and ability to comply. What we previously said about SMEs can be applied to all types of market players and organisations that don’t have the capabilities, the resources, even the time to engage at such a high level. Think about local authorities for instance. And bridging that, I think, was one of the reasons why I was intrigued by the mission statement of Accidental European.

Fatemeh: Building bridges?

Filippo: Yes, and it’s fundamental, otherwise we’ll forfeit democracy.

Fatemeh: What would be a more inclusive legislation, to help SMEs also participate in this transition?

Filippo: The first point that we need to recognize is that the approach taken with SMEs cannot be the same as that with big businesses. The problems with SMEs are not homogenous. Small businesses in Italy, for instance, do not have the same challenges as small businesses in Poland. The challenges of small businesses in one industry are not the same as in another. Manufacturing does not have the same challenges as tourism. This is what we’re exploring at Plus Value, to make the EGD accessible to SMEs and, ultimately, present it as an opportunity to transition towards a brighter future. Success boils down to the execution of the EGD!

Closing the “digital gap” with SMEs

Fatemeh: Can you tell me more about this exploration?

Filippo: We’re working on a digital platform that convenes data provided by SMEs across Europe, starting with a pilot in northern Italy. It works much like any other digital platform, relying on the participation of the individual users, in our case SMEs. However, it’s not just about generating a service, it’s really about creating a digital collective movement which transitions and aligns with policy.

Fatemeh: So, this is a way to connect SMEs to the legislative and European debates, to a certain extent? Or at least for them to see the impact of EU regulation on their activities?

Filippo: It’s to create the easiest possible digital tool which aligns their business to the green transition, while, at the same time, turning something that might appear as a “cost” into an opportunity by connecting such companies to investors (both equity and credit). It’s about matching financial, social, and green impact with clear financial benefits.

Fatemeh: How would you onboard SMEs so they use these new digital tools?

Filippo: Because of the perceived costs, it’s challenging to get certain SMEs to participate and use digital tools that index their impact profiles. Impact profiles present not only the added-value of SMEs in the green transition, but to all stakeholders (starting with their employees) by using dynamic data (meaning in real time) which also showcases any improvements over time.

Fatemeh: Seems like an important “digital gap”…

I am certain that we will address this “digital gap” through cultural change, as we demonstrate that environmental and social assessments are not a cost, but rather a major business opportunity.

It’s about building trust in these platforms. We can do this by making digital platforms a place where SMEs and their impact profiles are much more visible to specialised investors. It’s easy to find information about publicly listed companies on their environmental or social impact profiles, but for SMEs, such information is often not available. Closing the digital gap means getting these companies to use such digital tools for their impact profiles. This would allow SMEs to be more visible to investors, incentivising participation.

Sustainable finance can alter the DNA of capitalism

Fatemeh: Do you think that this could be a real game changer today in ensuring the success of sustainable finance, which is at the heart of the EGD?

Filippo: We need to change finance as it is. We need to break from the Milton Friedman paradigm which posits that business is just about generating profits for shareholders, and adopt the mindset that profit is a component of value, and shareholders are just one of the stakeholders for which the business generates value: workers, consumers, suppliers, the community, the planet are the some other stakeholders…¹The baseline was set in 1972 by The Brundtland Commission’s report for the United Nations, Our Common Future: it defined a sustainable company as ‘one whose current earnings do not borrow from its future earnings; whose sustainability practices . . . drive profitability and competitive positioning, and . . . provide goods and services consistent with a low-carbon, prosperous, equitable, healthy and safe society’.

This is a paradigm shift that requires significant changes in law and business practices; finance needs to factor in this broader understanding of value creation. We live under the reins of capitalism, and capital fuels the engine that drives the world. If we change the rules of capitalism, we change the world.

Fatemeh: Do you think that Europe could, through the EGD, change the paradigm of our economic model?

Filippo: Yes – you said it – that is the real agenda of the EGD. It’s about changing capitalism at its core, by changing its rule… its DNA

There is also a geopolitical angle to consider. There is an opportunity to renew the US – European alliance. The new Biden administration is committed to rejoining the Paris Agreement and appointed John Kerry, a heavyweight of the Democratic Party, to lead the change. But we need to start acknowledging that while the West ‘invented’ modern capitalism from which it greatly benefited, its undesirable byproducts – social exploitation, environmental destruction, consumerism, pollution, carbon emissions – were exported to the rest of the world. This is a chance to rebuild trust in Western values, including democracy as an effective model to curb economic excesses. The Green Transition could also represent a shared geopolitical agenda between Europe and the US.

A “just transition”

Fatemeh: More values, that’s really key today. Up until this point we’ve talked about “environment”, however, there are a number of social values that we have to take into consideration. The EU is discussing a social taxonomy. What are your thoughts on that initiative?

Filippo: Social taxonomy follows the green taxonomy, and is a necessary add-on. The green transition must be a “just transition”, and, with the social taxonomy, the EU has responded to that. They presented the first proposal a few weeks ago and my assessment is that, you know, it’s a first proposal, and it’s not as brave and comprehensive as the green taxonomy. It tends to have a more compliant approach because the main frameworks, the frameworks of reference, in terms of policy, are SDGs and human rights.

Fatemeh: Isn’t that a good thing?

Filippo: I would argue that European legislation is usually more progressive – it usually goes further than guaranteeing SDGs and human rights. This is probably one of the substantial differences between Europe and the rest of the world.

If social taxonomy is going to do more, we need to consider: how will it go beyond what is already embedded in European social legislation? What are the incentives for finance and business to do more and to do better?

Basically, if the EU wants a more ambitious social taxonomy, it needs to go further than current European legislation.

Fatemeh: If we’re aiming for a new social model that serves as an example for economic actors, where do you think we should start?

Filippo: I think I’ll answer practically – we cannot ignore the consequences of COVID on the economy and on the employment market. The post-COVID recovery and transition agenda has to focus [on] the future of work.

Indeed, Covid has hit employment and small businesses. Yet this boils down to a trend that started in the ‘80s: unemployment, erosion of the middle class, decreasing value of work against capital, cuts in social welfare, and ultimately rising inequality.

On the other end, digitalisation has also rendered redundant a growing number of jobs. Covid is just the nail in the coffin of a social contract reached after WWII that balanced out wealth creation and distribution.

We are facing an existential threat akin to climate change. We can either wait for things to collapse or work on a new social contract for the 21st century that re-centers the future of work in the global digital and green economy.

Fatemeh: Comes back to the slogan, “building back better”.

Filippo: While the slogan ‘building back better’ is becoming trendy in the media, it should nevertheless address both sides of the same coin: environmental and social.

The Green Deal must focus on creating a new social model that incentivises finance while businesses recognise and protect the value of all work for society in the post-COVID recovery and transition plans.

Changing the social paradigm with education, participation & innovation

Fatemeh: Beyond the topic of work, what would you consider some other priorities that Europe needs to seriously take into consideration to change this “social paradigm”?

Filippo: The other aspect is social infrastructure, in particular health, education and housing. All of them are being affected by COVID, all of them have shown their limits. And again, the limits we have witnessed in this area are not due to COVID… This pandemic has just magnified the problems that were generated by a set of choices, policies and economic evolutions. If we have to choose a priority, education would be the highest in order to change the social paradigm. Education is fundamental and represents a great investment endeavor for our future.

Fatemeh: Speaking of the future, social innovation is currently a topic of interest and buzz. What does social innovation mean to you within the scope of the EGD? What role does social innovation play in investment?

Filippo: First, civil society and collective action are at the core of social innovation. There are costs to greater participation, but there are also rewards. The challenge is to create the right financial and social incentives, as well as the institutional infrastructure to encourage and facilitate civil society participation. If we, for example, want citizens to participate in finding new alternatives to fossil fuels, we must provide them with the right motivations and incentives.

Second, the social dimension of the Green Deal is really a form of economic activism that relies on civil society’s understanding of the need to change lifestyles and modify their behavior in everything they do.

Fatemah: That’s easy today for, say, the most privileged segments of society. But what does that mean for the average citizen today, who doesn’t necessarily have the budget to purchase more “ethical” clothing or organic food?

Filippo: Yes, you’re perfectly right.

Ethical and sustainable behaviors [are] a luxury for the upper class. It’s even a fashion. We don’t have an offer for everybody. That is why we cannot ignore the fundamental role of market participation in social innovation, to facilitate this massive societal change. Policymakers need to create the conditions for the emergence of a market capable of offering sustainable and affordable products widely available for all consumers so they can make these behavioral changes. This would help to ensure a more “just transition”.

Fatemeh: Any examples of how the market has been used to drive social change?

Filippo: Probably the best example would be what Muhammad Yunus did when he developed the Grameen Bank, the first microcredit financial institution. He addressed a societal problem in Bangladesh via the market by creating a business model which offers poor people access to credit. That is the “good use” of the market: when the market offers new and ethical products that remain affordable for everyone.

We need to create the conditions for the “good use” of the market. Regulators and policymakers have a fundamental role to play here.

Today we have technology to help. That same microcredit solution today can be expanded in speed and outreach using digital payments, for instance, combined with financial planning, and micro investments and insurance. The technology is there. We just need to apply it for good use.

Some tips to help everyone get to the moon

Fatemeh: What are some recommendations that you would like to leave policymakers as they move forward with the social taxonomy?

Filippo: Focus on finance, data, and young people.

In finance, we need to do much more to engage the big players. We need to talk more about the implementation [of] sustainable finance. Cracking down on financial markets is essential. It wasn’t done enough after the 2008 global financial crisis; this is our second chance, and there won’t be a third one. It’s an opportunity to change finance at its core.

And then, the second one is data. We cannot avoid the digital transformation challenge, and I would say, in this case, opportunity. Indeed, the emergence of cryptocurrencies, blockchain, etc. is an opportunity. Their potential impact could be big, as well as their skyrocketing energy consumption. Digital innovation is not just about opportunities. It could have an unintended but implicit greater impact on the environment. So, the Green Deal needs to match digital transformation with the green agenda.

The third point: young people, we are missing them because we’re not considering them anymore. That is a problem.

Young people don’t recognize the social order for which the EU stands. So, in the eyes of most youngsters, the EU is a relic of the past. And this is really dangerous – a public institution that doesn’t mean anything to the younger generations is a dead institution. The EGD is a great opportunity for the European Union to connect with the next generations.

Fatemeh: On that note, I’d like to thank you Filippo for your time, and shedding some of your insights on this colossal initiative that has the potential to impact generations to come. If done right, of course.

Filippo: Indeed. Thank you Fatemeh.