In December, while the UN's COP 25 meeting was failing in Madrid, the EU announced its own Green Deal. The article in the first url below presents the highlights:
"It covers everything from housing and food to biodiversity, batteries, decarbonised steel, air pollution and, crucially, how the EU will spread its vision beyond its borders to the wider world. 'Our goal,' declared Mrs von der Leyen [the European Commission's new president], 'is to reconcile the economy with the planet.'"
These goals revolve around the bloc's commitment to be carbon-neutral by 2050 and, more immediately:
"By summer 2020 the commission intends to present a plan to reduce emissions in 2030 by 50-55% from 1990 levels. This represents a step up from its existing target of cutting emissions by 40% within the same time frame."
The key mechanism the EU envisions to achieve these targets is ESG and impact investments:
"All this green ambition comes at a price. The commission estimates that an additional €175bn-€290bn ($192bn-$320bn) of investment will be needed each year to meet its net-zero goals. Much of this will come from private investors. One way they will be encouraged to pitch in is with new financial regulations. On December 5th EU negotiators struck a provisional agreement on what financial products are deemed 'green.' Next year large European companies will be forced to disclose more information about their impacts on the environment, including carbon emissions. These measures, the thinking goes, will give clearer signals to markets and help money flow into worthy investments."
In particular, the European Investment Bank is to be re-purposed as "a climate bank":
"Already [the bank] has pledged to phase out financing fossil fuels by 2021. By 2025 Werner Hoyer, its boss, wants 50% of its lending to go to green projects, up from 28% today, and the rest to go to investments aligned with climate-change goals."
As the article notes, however, the EU's deal is grand in its ambition and woefully inadequate in terms of detail. Along these lines, the article in the second url below (written in response to new E.U. rule in responsible investments) tackles some of the challenges the EU will face in determining whether an investment can be defined as 'green' and, therefore, fit within the EU's guidelines to help it achieve its ambitious goals. The key comes down to whether the new policies are enabling investments that would not otherwise have been made:
"But a bigger question is whether the whole approach is productive as a way of allocating what should be 'concessionary' capital (meaning capital that accepts sub-market returns in exchange for social impact). The idea behind social-value investing ought to be, after all, to encourage things that would not happen otherwise. Sustainable or green investments wouldn't require a 'taxonomy' in the first place if they produced superior returns."
This is important because if such investments are only attracting capital that would have been allocated anyway, "Whatever the returns delivered, nothing of social value has been achieved that would not have happened anyway." In short:
"Creating classifications of social worth, or taxonomies of green-ness, may make people feel virtuous. But it has two big difficulties. The first is definitional: how do you construct a list that isn't capable of being gamed or delivering unintended consequences? The continuing EU political horse-trading suggests the green taxonomy could end up being one giant messy fudge. The second is more fundamental and reflects the fact that most investors continue to seek market returns and remain socially-neutral, whatever PR materials they may pump out. So as those investors who are socially-concerned buy green investments, thus driving up their value, socially neutral investors will simply sell those same stocks (to them, overvalued), meaning the net effect is zero."
Ultimately:
"Impact investments that really make a difference involve those that make them accepting sub-market outcomes."
That is, ESG/impact investing, in order to be true to its mission, should finance projects that otherwise would not have happened. If it is financing projects that would have happened anyway (due to the expected return/profit), then nothing is being changed. It is only when such investing funds projects that would not have happened that they will be making a difference – the trouble is that, the reason they would not otherwise have happened is because they are not expected to make a profit. In other words, the article is criticizing the attempt to justify such investments in terms of their returns and implying that, those funds that claim such a return are probably deceiving their investors.
Take care
David
David Chandler
© Sage Publications, 2020
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The way the wind is blowing
December 14, 2019
The Economist
Late Edition – Final
43-44
The difficulty with the EU's sustainable investment rules
By Jonathan Ford
December 14, 2019
The Financial Times
