EU Wants To Green The Financial Sector: Critics Fear A Green Nanny State

  • Date: 07/01/19
  • Handelsblatt

The European Union wants to bind the financial industry into the battle for a greener economy. But critics warn against the risks for investors.

 

The financial world should become greener. This lofty goal has been spearheaded by the European Commission who are asking banks, asset managers, pension funds and insurers to do their part to make this happen. At the heart of the project is a ten-point action plan presented last March, some of which has already been drafted into legislative proposals.

Specifically, it involves four of the ten points: How should one define ‘green’ investments? How can these products and services be integrated into investment advice? What obligations should investors and asset managers undertake? And what should the rules for sustainable stock indices look like?

The whole project is part of the European Commission’s comprehensive plan to meet the commitments of Paris Climate Deal and other goals for a comprehensively sustainable economy. In the financial industry, these goals are known by the English abbreviation ESG, which stands for Environmental and Social Responsibility. By the end of 2019, the points from the EU’s action plan should be implemented.

The EU Commission has also encouraged insurance and securities regulators to discuss changes to their specifications for the two industries. From this year on, for example, pension funds have to report on how to deal with sustainability in their investments.

The basic idea of ​​the EU is widely accepted in the industry. “The push is basically right,” says Julia Backmann of the fund association BVI. Nevertheless, there is criticism of the project anyway because the devil is in the detail. Bankers and asset managers fear that the new rules will create a bureaucratic monster that could end up harming investors.

Magnus Billing, head of the Swedish pension fund Alecta, warns: “We have to be careful. There is the danger of over-regulation.”

The prominent asset manager Bert Flossbach already sees a ‘sustainability’ tsunami rolling towards the financial sector.

Wesselin Kruschev of the banking consultancy Capco is even more outspoken: “Some bankers say: This is nonsense, and no one needs that. But the critics dare to speak out only behind closed doors, because publicly no one wants to be the bogeyman, of course.”

One of the central challenges of the project is the question how companies select themselves into sustainable and unsustainable ones.

In July 2018, the EU Commission set up a group of experts to come up with ideas. A first interim report is due this summer. “However, it’s often hard to say what ‘green’ really means,” says BVI expert Backmann. Angela McClellan, Managing Director of the Sustainable Investment Forum, also talks about an “extremely difficult, very complex problem”.

Capco man Kruschev provides some examples. Even a tank could be produced sustainable, but in the end it’s just a tank. Weapons manufacturers are usually excluded from the outset from sustainably fonds.

But it’s not just about weapons and other potentially harmful products: “Can a food manufacturer be considered sustainable if it uses genetically modified products?” Kruschev asks. Also, the manufacturers of electric cars could make the sustainability status contentious because the avoided CO2 emissions would ultimately be shifted towards other sectors.

For BVI specialist Backmann it is even conceivable that one-sided sustainability criteria can collide with the actual investment goals. “Just because an activity is ‘green’ doesn’t means that the company is automatically risk-free,” she says.

Fund manager Flossbach highlights the German solar industry as a cautionary example. Ten years ago, solar stocks had been a great hope for many investors. With a few exceptions, most of these companies have since gone bankrupt.

Full post (in German)

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