GREEN FINANCE: Finance on the brink: central banking tackles sustainability’s hard truths

As global leaders in sustainability gathered in Madrid last week to discuss the theme of “finance on the brink”, the mood was not one of climate doomerism but of sober, pragmatic reflection. The joint conference — hosted by Green Central Banking, the European Banking Institute (EBI), and Universidad Carlos III de Madrid (UC3M) — captured a pivotal moment for green finance, as the industry stands at the intersection of overlapping crises.

The global financial system is facing a choice: retreat and risk accelerating climate collapse, or lean into resilience through uncomfortable but necessary collaboration.

“We truly stand on the edge of multiple transitions at once,” declared Juan Carlos Delrieu, Head of ESG at the Banco de España. “At the very moment when we need more decisive climate action, political fatigue and polarisation threaten to stall momentum. At the very moment when reliable data is more needed to manage transition, simplification risks shrinking our information base”.

The prevailing tone of the conference was one of pragmatic realism.

“Sustainable finance cannot be taken for granted,” observed David Ramos Muñoz, Associate Professor at UC3M and EBI member. “Sustainability is being questioned around the world”, and we must face “uncomfortable topics” if we are to find solutions.

Resilience, he told Green Central Banking, requires confrontation rather than avoidance: “You are more resilient and can build more resilient economies when you face problems head on.”

The competitiveness question
A question that animated much of the debate was whether meaningful sustainability regulations threaten business competitiveness by creating unnecessary complexity and compliance costs. This issue is especially relevant in light of the ongoing sustainability omnibus proposal in the EU, which aims to reduce reporting requirements. Panellists emphasised that concerns about compliance costs are legitimate, but stressed this is a challenge fraught with nuance.

Juan Carlos Delrieu flagged the risk that small firms bear a disproportionate share of the burden. Eila Kreivi, former EIB director and head of capital markets NED at Finnvera, described how well-intended proposals often become tangled in political battles, amplifying confusion for businesses.

Ramos Muñoz lamented “meaningless numbers of data points that no one is going to use”. At the same time, Luis Eduardo Stancato da Souza, a bank supervisor at Banco Central do Brasil, found the EU’s framework “impressive” and highly “useful for supervisors,” but potentially “frightening” for those required to comply.

Despite varied concerns, panellists agreed the root problem is rushed, poorly coordinated reforms. Kreivi was clear: “Simplification only by deregulation… is silly.”

Even if regulatory requirements are relaxed for smaller firms, market forces still drive large funds and institutional investors to place information demands on smaller firms throughout the supply chain, according to Kreivi. This indirect reporting pressure could actually amplify, not shrink, the compliance burden as reporting systems fragment.

José María de Paz, corporate partner at international law firm Pérez-Llorca, warned that private ESG rating firms would likely pick up the slack but that these firms are generally unwilling to share data and methodological approaches that give firms a “competitive advantage.”

Data will be collected, but lose reliability and comparability, moving ESG reporting from public transparency into isolated, private hands, he warned.

Smarter simplification
Without robust regulation, fragmented governance and information silos emerge, making it harder for supervisors and the market to detect risks, warned various panellists. The length of forms may shrink, but the complications will persist, especially as market forces and international supply chain pressures drive firms to maintain some level of disclosure.

“Market demand for high-quality ESG data is still there and growing,” said Natasha Katz, banking engagements lead at data analytics firm Climate X. Far from being a cost burden, rigorous climate disclosures are increasingly recognised by firms as providing a genuine competitive edge, with “a clear business case,” she added.

The consensus was not to implement wholesale deregulation, but to achieve smarter simplification: leveraging digital tools to lower reporting costs, clarifying key definitions, and focusing regulation where it drives innovation and frontier technologies, rather than entrenching legacy fossil industries.

A woman seeks water in a dry riverbed near Kataboi village in remote Turkana in northern Kenya.In 40 degree heat and no access to clean water, she resorts to collecting unfiltered water for her family in containers.
Photo: Marisol Grandon/Department for International Development
Beyond false trade-offs
Panellists at the event also considered whether sustainability overlooks the concerns of real people and whether the trade-offs between social, environmental, and competitiveness are insurmountable.

“The social dimension is the most important one — we’re doing all these things because of people. If we anchor policy in human impacts, priorities become clearer,” said Stancato da Souza. He outlined Brazil’s experience in implementing credit exclusion policies for forced labour since 2008, demonstrating how principles-based approaches can work effectively without overcomplicating compliance.

In the EU, Kreivi cautioned, social-risk reporting has become overly complicated, obscuring real harms such as worker exploitation or community costs. She stressed that the principle of “do no significant harm” (DNSH) is key. Rather than chasing perfection, we should focus on screening out the worst actors, she stated. Returning to an earlier, simpler version of the DNSH criteria –centred around yes/no criteria and simple numerical ratings- would be both pragmatic and effective.

However, David U. Socol de la Osa, assistant professor in legal innovation at Hitotsubashi University, noted that the net-zero transition brings specific social risks.

“Decarbonisation of transport, for example, requires lithium and cobalt, but what are the human rights impacts of extraction?”

He advocated for stronger corporate due diligence mechanisms tied to economic agreements, as well as multi-stakeholder approaches, citing an example from Mongolia as a practical way to restore rights and bring civil society back into transition planning.

Geopolitical realities
Another theme during the conference was geopolitics and how sustainable finance can function within an increasingly fractured international order.

Socol de la Osa warned that with China and the US carving out distinct, often antagonistic economic blocs, this could result in a “race to the bottom” in due diligence in the context of green mineral supply chains.

Dinita Setyawati, senior energy analyst at Ember Energy Indonesia, highlighted how China’s combination of south-south cooperation, infrastructure investment, capacity building, and heavy renewables spending has secured it strategic partners across East and Southeast Asia and the Global South, enabling the Chinese state to establish dominance across the green mineral value chain. Yet, despite advancements in green manufacturing that this has brought, much of the clean energy output still goes abroad.

Chinese manufacturers “dump their surplus solar components and do the manufacturing in Indonesia and then export” into the Global North markets, explained Setyawati. The US, by contrast, remains viewed by many mineral-rich nations in Southeast Asia as out of touch with local priorities, she said.

But the situation is more complex than simply one of Chinese domination. Etienne Espagne, a senior climate economist at the World Bank, presented his forthcoming research, which shows that while Chinese firms operate many mines, the equitable ownership is frequently held by American investors, leaving developing countries with limited gains from their own resources. This raises the question, “What is left for developing economies to fuel their own green industrialisation?”, asked Espagne.

Just energy transition platforms, such as those championed by Brazil and Indonesia, offer some promise, seeking to tackle the core issues holding back green industrial initiatives in the Global South. In particular, foreign sovereign debt, limited investment, and volatile exchange rates.

Meanwhile, Socol de la Osa acknowledged sovereign debt in foreign currencies as the “elephant in the room”. Such structures frequently trap resource-rich nations in a cycle of exporting raw materials to gain access to the reserve currencies needed to service foreign currency-denominated loans, narrowing fiscal space for home-grown transition finance or infrastructure investments.

This cycle can perpetuate the conditions for China and the US to establish external dominance through offering foreign direct investment in the form of foreign currency loans. Socol de la Osa stressed that economic superpowers finance infrastructure development via foreign currency debt to “maintain alliances throughout time” by creating enduring obligations. “That’s the functionality of that debt system”.

Espagne explained: “There is certainly a strong link between currency hierarchies and financial constraints that hold back developing nations”.

“We are witnessing the decay of the global financial architecture, but without a clear sense of what’s emerging and to replace it”, he said in reference to the emerging mega-trend of growing Chinese influence in green energy supply chains. The question now, he said, is whether the “next system provides true agency for the Global South, or simply imposes new fiscal constraints,” as green industrial projects remain tied to foreign-denominated loans that force economies to prioritise exports over domestic energy needs.

One solution Espagne endorsed is extending central bank swap lines beyond the usual allies, creating “a more equitable and stable financial order”— one less skewed towards the top of the currency hierarchy.

Building bridges from turbulence
The lesson from the experts in Madrid was clear: resilience in sustainable finance requires honesty, innovation, and cooperation. The false choice between deregulation and paralysis must give way to a pragmatic evolution — one that balances oversight with flexibility, social outcomes with economic realities, and ambition with realism.