Wednesday, November 03, 2021
Reforms for climate protection
“A financial market that crashes is not sustainable”
The financial market is seen as an important factor in transforming the economy in a climate-neutral manner. But so far, billions have been invested in oil and coal, even from alleged sustainability funds. Expert Magdalena Senn from the citizens’ movement Finanzwende explains in an interview with ntv.de why this not only harms the climate, but also endangers financial stability.
ntv.de: Why is the behavior of the financial market and the actors there such an important issue for climate protection? Shouldn’t politicians determine the climate goals and the way to achieve them, such as when to phase out fossil fuels? Why do we need complicated extra rules for the financial market?
Magdalena Senn: So far, politics has not been able to define a binding way to achieve the climate protection targets. A lot of money can still be made with investments in fossil fuels such as oil or even coal. These investments then tend to have a horizon of several decades. The projects sometimes commit us to oil in the long term, but we no longer have the time. And acting like this not only harms the climate, it also leads to risks for banks and other investors. Because these investments could become largely worthless overnight – for example, if the government decided to withdraw at the world climate summit. The result would be a new financial crisis. And even without political action, investments could become worthless as a result of climate impacts. In addition, sustainability in the financial market is also a consumer protection issue. Because private investors are offered countless green funds and other investment products that often do not keep their promises.
It should be in the interests of banks and other financial institutions to correctly price such risks. Why doesn’t this happen?
It seems to me that there are enormous forces of perseverance at work. In the short term, you can still earn big profits with climate-damaging investments. At the moment we are seeing that investors like large pension funds are already withdrawing from some climate-damaging investments under public pressure. Then, however, less transparent investors such as hedge funds are ready to continue these investments. That is why we need transparency in order to know where the climate risks for financial stability lie and how they can be reduced.
But doesn’t that also mean that it is hardly possible to use the financial market to influence the sustainability of the economy with the help of rules for green investing et cetera?
We definitely won’t get any further here with small and small. Even if we regulate banks and other investors accordingly – for example by finally having to adequately hedge against climate risks so that banks do not have to be bailed out with taxpayers’ money in the event of a crisis – there will always be other actors, so-called shadow banks, some of which evade such regulation. That is why we at Finanzwende take the position that the financial sector can only be truly sustainable with comprehensive reforms. That is, the extreme short-term nature and speculation would have to be addressed. A financial market that crashes every ten years cannot be sustainable. New green rules alone are not enough.
Representatives of banks and other large insurance companies recently emphasized that a lot has changed in the past few months, especially as a result of new rules in the EU?
There is movement, but more in triple steps. But we don’t get to the finish line in time. As a legislator, the EU has recently initiated a number of things. The ECB has announced a climate stress test for the coming year in which it will assess the corresponding risks. The insurance supervisory authority also draws up proposals for its industry. We are seeing a change in thinking. Investors understand that sustainability is important and that it affects them. But not much has changed in practice. Because with climate-damaging business models, you can still earn so much money, just like with supposedly sustainable funds for private investors, on which the label ESG is on it, but in which, for example, stocks of oil companies are included.
What is ESG investing about and what is the problem with it for retail investors?
ESG is the abbreviation for ecological, social and corporate governance criteria for investments. The label is used by many funds that take some form of ESG factors into account when investing. However, there are no standard rules on how to do this. Some providers use the so-called best-in-class approach. This means that they each invest in the company from different industries that does best in terms of sustainability. But then often even oil companies end up in sustainability funds. Others may rule out very bad climate offenders, but find gas extraction, for example, still acceptable. At the fund subsidiary of Deutsche Bank, the accusation is in the room that the access of fund managers to ESG data of the companies alone was enough for the investments to be rated as sustainable. Apparently, the data was not evaluated at all. If all of this turns out to be true, greenwashing would be in its purest form.
What can consumers do who really want to invest their money sustainably?
You have to take action yourself and unfortunately that has been a bit time-consuming so far. There are databases such as “Faire Fonds”, in which one can find good information about sustainable funds. However, since there are currently no binding standards for sustainable investments, it is up to the investor himself to get an idea with the help of a large number of private standards and labels and ultimately to take a closer look at each product.
Didn’t the EU adopt its taxonomy, binding standards, for ESG investments this year?
This so-called taxonomy, in which binding rules are laid down, could actually provide the basis for consumer labels and thus clarity for investors in the future. So far, however, only the basic structure of these rules is available. A wild debate is still raging over the details. Germany, for example, is lobbying the EU Commission to ensure that energy generation from natural gas is also qualified as sustainable. France, on the other hand, strongly insists that nuclear energy be included. And in the end it looked like both would prevail. According to a recent survey, 82 percent of Germans reject nuclear energy in sustainable financial products. This means that the EU taxonomy and the labels based on it may have a credibility problem in Germany from the start. The federal government must prevent this from happening, otherwise we are hardly one step further.
With Magdalena Senn spoke to Max Borowski