How properly measuring emissions and regulating financial markets can mitigate climate change.
In recent years and even decades, there has always been a lot of discussion about regulations in the area of sustainability. In Europe, the Emissions Trading System was introduced, coal-fired power plants are to be banned, and in current exploratory talks in Germany, discussions are underway on the how and the if of banning cars with combustion engines from the roads.
What is just as important, but often not in the focus of the media, are sustainability regulations for the capital markets. Because private and institutional investments in funds, shares or other investment products can aggravate climate change, but also mitigate it.
In our latest episode of The Cooler Future Podcast, we had an interesting conversation with Peter Lindström, Chief ESG Specialist at Danske Bank Asset Management, about the opportunities that regulations can open up in the capital markets.
Stay tuned to get current ideas and discussions explained directly by a financial market expert!
Disclaimer: The following content reflects the views expressed by the interviewee during the discussion.
If you'd rather listen to the podcast and don't feel like reading the summary yourself, you can find the entire episode here.
1. Although many private investors care about investing in sustainable investment products, there are many companies that exploit our natural resources and/or engage in greenwashing. Therefore, we need regulation in the capital markets.
2. In the EU, the Sustainable Finance Action Plan was adopted in 2018, which includes various initiatives for a more sustainable economy. One of the initiatives, Sustainable Finance Disclosure Regulation, was partially introduced this year and has ensured sustainability standards on the financial markets.
3. But in order to make decisions about corporate sustainability, we need one thing: data. At present, this is still lacking in many places.
In the podcast, Peter Lindström explains that there has been a shift in the capital markets in recent years: although the term "sustainable investing" has been around for about 20 years, there has been a shift in the industry towards stricter criteria and more sustainability.
Lindström describes that at the initial stage only restrictions for investment universes were used - that means that when selecting companies to invest in, some exclusion criteria are applied, such as the exclusion of companies that produce tobacco or weapons. Nowadays, these criteria have been greatly expanded and portfolio or investment managers no longer only consider risk and return criteria when selecting companies, but also consciously consider sustainability.
From sector to sector, these sustainability criteria can look very different - environmental impact in the energy sector, the presence of social and employee problems in the tech sector, or governance aspects in the banking sector can all be considered when making investment decisions.
Even though many investors have changed their opinion about investments and now put emphasis on their personal values when investing, there were an extremely large number of companies in the past that were exploiting natural resources - biodiversity, water but also human rights, etc. which justifies the need for regulation.
Another reason is the so-called "greenwashing", i.e. the presentation of one's own company or investment products as greener than they actually are.
According to Peter Lindström, there’s a trend to use certain buzzwords like “ESG”, “Sustainable” or “Ethical” just because they reflect investors' potential values.
At Cooler Future, for example, we took a look at 3 "green" ETFs, and you can't imagine what we found in these "sustainable investment products"...
In the EU, the Sustainable Finance Action Plan was already approved in 2018. Since that day, it has been basically clear that we will get a regulation that also affects the capital markets.
In March 2021, the first part of the Sustainable Finance Disclosure Regulation came into force, which is intended to promote the disclosure of sustainability and emissions data in the financial sector by making it obligatory.
An essential part of this regulation for private investors is the new, mandatory division of investment funds into the three categories "other funds", "promote ESG characteristics" and "sustainable funds" which have a rather strict ruling around the objective of the fund.
According to Peter Lindström, this will provide more clarity in the financial industry as to which funds are actually sustainable and which are less so and will urge asset managers to be more careful in the future on what to call sustainable because they have to back themselves up.
For all these regulations to work, however, there is one thing we absolutely need: data. And reliable data to be precise. Currently, there is still hot debate about how to measure sustainability data most accurately. According to Peter Lindström, however, we must be able to measure sustainability in a timely manner.
One thing that is already happening today is that investors or asset managers use ESG rating companies to measure the impact of potential investments. However it’s important to not blindly follow these ratings but to also dig a bit deeper.
In the past, this has been really hard just because there was no data available, except for the information that is provided by the companies, e.g. sustainability reports. However, it is quite clear that these reports and disclosures can be a bit biased (hello greenwashing!).
Although the new regulations will change some things by making the disclosure of data mandatory, there are still some gaps as especially in the private sector (i.e. companies that are not listed on the stock exchange) there is often no legal obligation to report sustainability data.
Yet Peter Lindström explains that non-financial reporting will be expanded in the future to private companies as well.
In the Cooler Future Podcast with Peter Lindström, we discussed the topic of regulation
It turned out that on the one hand there is a great interest from investors to invest in sustainable products, but on the other hand there is exploitation of resources and greenwashing.
Regulations like the Sustainable Finance Disclosure Regulation should prevent this in the future and mitigate climate change.
In order for the regulation to be effective, however, company data on emissions and sustainability are required. This means that private and public companies must also do their part and that a legislative document alone will not be enough.