What is Sustainable Finance?

By Marc Goergen

On January 8^th and 9^th, 2019, the Technical Expert Group on Sustainable Finance (TEG) of the European Commission and Community of Practice in Financial Research (CoPFiR) organised a conference in Brussels on Promoting Sustainable Finance. The conference was held within the wider context of the EU’s long-term strategy of a climate-neutral Europe by 2050. The conference benefited from the participation of a number of policy makers as well as several leading practitioners and academics. IE Business School’s Marc Goergen, Professor of Finance, was among the participants and speakers.

While the conference was organised by the Directorate-General for Financial Stability, Financial Services and Capital Markets Union (FISMA), the conference covered two distinct but equally important sides of sustainable finance.

The first aspect is about the role that the finance industry and capital markets play in tackling global warming. For example, responsible investors, i.e. investors concerned about environmental, social and governance (ESG) issues, are playing an increasingly important role in shaping their investee firms in such a way that these issues are given more weight in their decision making. For example, Hans-Christoph Hirt, Head of Hermes EOS, mentioned the many interventions he had made in Volkswagen AG (VW), the German car manufacturer, on behalf of Hermes, which has held a stake in the company since the first half of the 2000s. While such interventions preceded the VW emissions scandal, they became even more extensive in the immediate aftermath of this scandal.

The second aspect of sustainable finance relates to the stability of the financial system, in particular the banking system, and the prevention of future financial crises. While the conference focused mainly on the first aspect of sustainable finance, this second aspect is nevertheless an important issue, since financial crises, such as the 2008 & 2009 Great Recession has proved, can have severe and long-lasting consequences not just for financial stability, but also for social peace and investment in renewable energy. Clearly, a sound financial system goes hand in hand with tackling long-term societal challenges such as global warming.

A number of important topics were discussed at the conference. For example, much more needs to be done in terms of eco-labelling. While some investment funds claim to be green or eco funds, Adair Morse, professor at the University of California at Berkeley, argued that intentionality matters. She proposed a taxonomy distinguishing between three types of investors, i.e. those focusing on social returns (“impact intentionality”), those focusing on financial returns (“financial intentionality”) and those in between (“dual intentionality” or broader sustainable investment). Another important topic was the reporting of data on greenhouse gas emissions by businesses, including quality and homogeneity issues of such data. For example, Timo Busch from the University of Hamburg raised issues about the coverage and quality of data on company CO2 emissions published by the main financial data providers. Another important issue that was discussed at the conference by Nora Pankratz from Maastricht University was the financial costs to companies from extreme heat days, which have been shown to reduce workers’ productivity. Her study found evidence of the substantiality of such costs.

Finally, Marc Goergen suggested that individual societal challenges are frequently tied to each other. His presentation showed evidence that females on corporate boards of directors increase the consumption of energy from renewable sources, thereby reducing the consumption of fossil energy, believed to be the main driving force behind global warming. Hence, tackling the societal change of increasing diversity in corporate boardrooms may also move us closer to a more sustainable society.

Video recordings of the keynotes, panel discussions and presentations as well as PDFs of the presentation are available from the conference website. The current state of the TEG’s work on developing a taxonomy of sustainable finance can be found here.