What can the international financial markets contribute to the urgently needed green restructuring of the economy and thus to the fight against climate change? At first glance, a lot, because the boom in green financing is continuing. Never before has so much money been raised on the capital markets for sustainability purposes as this year. The total global volume is approaching the two trillion euro mark.
One increasingly gets the impression that financial products only have to be given the green label in order to be inundated with investment money. It’s not just companies that are riding the wave, states have also discovered the demand for these asset classes. In an international comparison, Europe was able to take the lead, with the USA and Asia following far behind. Some are already jubilant that Europe is the big winner in green finance.
The particularly large amount of green capital available, it is said, will accelerate the restructuring of the economy in comparison to the USA and China. Such a view, however, fundamentally misjudges the interdependencies of capital markets. A first critical question is: what is green finance anyway? Views on this differ from country to country and there is no uniform classification.
While, for example, nuclear energy is viewed as environmentally friendly in France, the opposite is true in Germany. As a result of this uncertainty, some financial institutions are increasingly being accused of not being overly precise with the classification of green investments and of giving marketing priority over substance.
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This accusation is summarized under the heading “Greenwashing”. But even if there were a uniform and generally accepted classification of green investment opportunities, the battle would not be won.
Investors are ready to forego returns
Because the second critical question is: Will green financing even provide additional funds for the sustainable restructuring of the economy? In many cases this question can be answered with a clear no.
An example: In the case of the “green” federal bonds issued for the first time in September 2020, it is not the case that the funds raised are also used for the sustainable restructuring of the economy. Rather, the German federal budget was only examined to determine which expenditure already planned should be classified as green.
After the total of these expenditures was determined, the federal government sold green bonds in exactly this amount – so nothing has changed.
This federal approach is by no means reprehensible, in the interests of taxpayers it is even to be welcomed: The state has presented the process transparently and has not suggested that additional green projects are being financed. Due to the great demand for green investment products, he benefited from particularly low prices and was thus able to reduce his financing costs.
Conversely, investors seem willing to forego returns if they feel they are doing something good with it. However, a good feeling does not necessarily correspond to an effective contribution. The Scientific Advisory Board at the Federal Ministry of Finance has therefore criticized the often all too naive handling of sustainable financing and pointed out ways for real opportunities.
Because despite some misleading labels, there is definitely reason to be confident: Green financing, properly understood and used, can actually make an effective contribution to restructuring the economy.
This applies primarily to active investors who intervene directly in the business policy of the companies in which they have invested: For example, shareholders can refuse to exonerate the management if they consider its efforts to reorganize the company to be inadequate.
Banks offer climate offenders worse conditions
Banks, in turn, can deny their borrowers funds or only offer them at very unfavorable terms if they expect a company to be more committed to climate protection. This results in the apparently paradoxical situation that climate-conscious investors achieve the most when they invest in companies that have previously been known to be climate offenders.
Because with these companies, through their intervention, they can reduce CO2 emissions significantly more than with companies that are already climate-friendly.
However, investors should not be subject to the fallacy that investing in a green restructuring of companies will automatically generate higher returns. That can be the case if they recognize earlier than other investors that a company is on a climate-damaging wrong way with its production technology and that a quick change of direction would increase its earnings opportunities. But this is not the rule, because investments in exclusively green asset classes deny investors the opportunity to diversify their capital as widely as possible.
This realization is also part of the truth about green finance. In competition with the USA and China, Europe would do well not to rejoice too early in its current pioneering role. Rather, Europe should use the momentum and create the conditions so that investors can actually contribute to a green change of course in companies with their actions.
There are a number of good starting points for this: The rules on corporate governance should be strengthened in this sense.
The tendency towards passive index investments that has been observed over many years and in all major international capital markets will soon turn around once it is recognized how important interventions by capital providers are in the green restructuring of the economy.
A thriving market for venture capital would be another key element. Because while Europe is lagging behind the USA and China in many technological developments, there is the possibility of creating the next group of unicorns in the field of air conditioning technology on the old continent by closely interlinking science and practice.
The innovative strength of European companies
It is often said that Europe only contributes ten percent to global CO2 emissions anyway. But European companies could not only significantly reduce the emissions caused by Europe through their innovative strength, but also become the benchmark and sought-after provider for CO2 reductions all over the world. This would also reverse the distortion in the market values of European companies compared to American and Chinese competitors.
The fight against climate change is too important to just follow seemingly plausible arguments. It is high time to move from a naive to an enlightened approach to sustainable finance – in the interests of investors and the environment. The Glasgow Climate Conference should send out a strong signal for this.
The author: Jörg Rocholl is Professor and President of the European School of Management and Technology Berlin and Deputy Chairman of the Scientific Advisory Board at the Federal Ministry of Finance.
More: Which investors are driving the green restructuring of the economy.
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