After the green backlash - a new realism?

Newsletter #12

Photo by Jim Wilson on Unsplash

After a bumper year for green finance in 2020, we are seeing definite signs of green fatigue and a growing backlash. Too much greenwash, too many unverifiable claims, too many apples and oranges — it is becoming easier by the day to dismiss the ensemble as meaningless.

I can’t help but wonder, is this the dawning of a New Realism in green finance?

Today’s newsletter will focus on a few aspects of the New Realism, as well as offer an update from the embattled progress of the EU’s Taxonomy on Sustainable Finance.

Highlights from Green and Sustainable Finance

What’s striking about the recent upsurge of critical articles on ESG is the way it fortifies the debate on both sides, and challenges practitioners to do better and go deeper. In a way, you could say that ESG is no longer a child who needs to be protected from some harsh aspects of the real world.

Part of the coming of age inevitably involves dashed hopes and unfulfilled dreams.

“The Complicity of Corporate Sustainability” reads like a cri du coeur from a veteran of sustainable business. Auden Schendler writes that sustainable business is not just a harmless distraction, it actually crowds out meaningful action.

The actions businesses take under the banner of win-win, profitable, and good-for-the-planet corporate sustainability were exactly and precisely what the fossil fuel industry would want them to do. These moves ensure that businesses take responsibility for the climate problem only as their own individual emissions challenge, instead of seeing it as a systemic issue. It creates a focus on sustainability actions so lame and smallball that they could never and would never disrupt the fossil fuel industry’s hammerlock on governance.

His conclusion is stark:

Corporate sustainability as currently practiced, researched, taught, and reported on remains the best way to enable the success of the fossil fuel industry in accelerating climate catastrophe.

Swedish academics push back on the government’s pressure on pension funds to go fossil-free

Sometime in the pre-COVID world, I attended an event in Paris where a Swedish minister showed up and wowed the audience by declaring her government’s goal to become “a fossil-free welfare state” by 2045.

So it was a jolt to my perception of Brand Sweden to learn of a column published earlier this year by a group of Swedish academics taking issue with government pressure on pension funds to divest completely from fossil holdings.

This risks reducing future pensions, but cannot be expected to make a significant difference for the climate.

Although returns on green investments had been very good over the last year, they argue that decades of financial research showed one should be sceptical. Large pension funds would be better off to use their broad holdings in listed companies to seek to influence the transition by owning and controlling the companies.

👉 Perhaps there is a society-wide conversation to be had about what we expect from our pension funds.

A Harvard law professor publishes a paper showing that increasing board diversity is bad for a company’s share price

In a recent paper entitled “Will Nasdaq’s Diversity Rules Harm Investors?”, we learn that:

the empirical evidence provides little support for the notion that gender or ethnic diversity in the boardroom increases shareholder value. In fact, rigorous scholarship—much of it by leading female economists—suggests that increasing board diversity can actually lead to lower share prices. The adoption of Nasdaq’s proposed rules may well generate substantial risks for investors.

The background here is that last year Nasdaq asked the Securities and Exchange Commission (SEC) to approve new diversity rules — with an aim to have at least one director self-identifying as female and another self-identifying as underrepresented minority or LGBTQ+.

👉 Reading this made me think of what opponents of the right to vote for women must have argued at the time: giving women the vote is a “nice to have” for society, but there is no empirical evidence that it leads to better policy outcomes.

Academics protest corporate lobbying of EU’s green classification system

A leaked version of the EU’s Taxonomy on Sustainable Finance on March 22 has triggered a passionate protest against corporate lobbying led by academics.

The taxonomy was adopted over eight months ago, but we’re still waiting for the final technical screening criteria, expected on April 21.

👉 The criteria for steel, hydropower, shipping and real estate were changed to meet specific industry criticisms.

A group of nine academics have threatened to walk out of the EU’s advisory platform on sustainable finance if the European Commission maintains this watered down proposal, under which natural gas can be “green” when it replaces coal in specific regions. Additional concerns relate to forestry and biomass.

At best it’s a green marketing guide, at worst it’s a greenwashing guide — we’re really in a very dire situation where we have to all reconsider what we’re doing here

said Andreas Hoepner of University College Dublin and a member of the Commission’s advisory Platform for SustainableFinance.

Swedish bank SEB writes in the April 15 edition of its Green Bond newsletter:

All of this does not change the fact that the EU still has one of the most visionary and ambitious transition frameworks in the world, both when it comes to investment and regulation. However, if the taxonomy turns out to have less backing from platform experts and political infighting keeps delaying the implementation, the EU’s global leadership in this area may be challenged by China and the US.

From the podcast and beyond

Finance Watch, home of former 🎧 guest Thierry Philipponnat, weighed into the regulation debate earlier today when they shared news of a recent survey that ranked 10 proposals for how financial regulation could be changed to boost climate efforts.

The proposal drawing the most support was for regulators to impose tougher rules around the amount of capital banks need to keep as a buffer if they want to lend to companies responsible for emitting high levels of greenhouse gases.

Thierry gave us an explainer of the Finance Watch proposal when he joined us earlier last year, and helped to break down the doom loop that regulators seem to be trapped in. You can revisit that conversation here.

Coming soon is a deep dive into the Danone case, which looks at the future of sustainable business in the face of rising hedge fund activism, and how to cultivate a sustainability mindset.

📚 If you enjoy this newsletter, please share with a friend or colleague.

📺 If you’re interested in the latest research on sustainable finance, I’ll be moderating a session on April 27 with a fantastic guest line-up, including Andreas Hoepner, who is mentioned in this newsletter for his role leading the academic protest on the EU Taxonomy. Agenda and registration here

Denise