The role of capital markets in saving the planet and changing capitalism - just kidding

Keywords: ESG, greenwashing, capital markets, CO2 reduction
Session Type: Virtual Paper Abstract
Day: Tuesday
Session Start / End Time: 3/1/2022 11:20 AM (Eastern Time (US & Canada)) - 3/1/2022 12:40 PM (Eastern Time (US & Canada))
Room: Virtual 1

Abstract

ESG or sustainable investment has experienced a massive inflow of funds, further accelerated by the pandemic. We focus here on the environmental part. There is a lot of emphasis on ESG in the media and among the finance community - one could easily believe capital markets are a major contributor to the goal of limiting global warming. We argue that there is an ongoing race for the dominant narrative, in which the finance industry is eager to show green initiatives in order to block further (potentially hurting) regulation. Three main arguments back our analysis: First, actual changes in the real world driven by capital markets are rather minuscule. Slightly higher capital costs do not translate into meaningful price changes, and anyway often meet a demand with low elasticity. Second, while some investors are willing to sacrifice return for the greater good, most intermediaries do not. The risk most fiercely debated in the finance community is not a warming planet, but potentially upcoming regulation (“transition risk”). Often the promotion of ESG investments is driven by higher fees for fund managers, accountants, data providers, rating agencies and investment bankers. Greenwashing standard products is lucrative, and, in the absence of a common standard, easily feasible. Third, many green investments would have been done anyway, their conventional financing is just replaced by more prestigious green financing. Stricter real-world regulation is needed as even fully green capital markets will not save the planet.