Opening the symposium, Ralf Fücks, President of the Heinrich-Böll-Stiftung, emphasised the close correlation between stabilising Europe's financial system, reviving Europe's national economies and their green transformation. One of the major challenges lies in channelling the large quantities of available investment capital into both long-term and ecologically sustainable investments. Annelie Buntenbach, Member of the Federal Executive Board of the German Trade Union Confederation (DGB), emphasised that European trade unions were very quick to point out the need to finance the real economy and, linked to this, the need to reorganize the financial system.
Keynotes
The first round table discussion began with two keynotes. A speech penned by Thierry Philipponnat, Secretary General of Finance Watch, addressed the European Commission's Long-Term Financing initiative. From the point of view of Finance Watch, this initiative does not pursue the goal of changing the focus of the financial system from short-term to long-term but is instead intended to foster growth through additional financial instruments. Finance Watch equally calls into question the fundamental belief that bank lending also has to decline as a result of bank balance sheets having to be cut in the aftermath of the financial crisis: since loans to the real economy have only accounted for 28 per cent of bank balance sheets up to now, the required deleveraging could therefore occur in other parts of the balance sheets. This is difficult to manage from a regulatory standpoint, however, though the often discussed separation of commercial and investment banks could help achieve this.
Finance Watch takes a critical view of the financial instruments advocated by the Commission, in particular the revival of securitisation and the promotion of public private partnerships (PPPs) for three reasons: securitisation tends to favour short-term and procyclical funding; PPPs have a questionable track record in terms of efficiency and cost; the resulting pressure to achieve returns on investment could have a negative impact on users of public goods that are to be privatised. Instead of focusing on cheap loans and thus risking creating a new bubble, the significance of inequalities for the lack of growth should therefore play a greater role.
Gerhard Schick, the financial policy spokesperson of the Green parliamentary group, followed on by stating unequivocally that it was logical that a green financing strategy cannot be separated from a restructuring of the financial market, as the continued increase in short-term financial market activities shows, for example. But he also made clear that the two areas, in part, also function independently of each other and require different regulatory agendas. On the one hand, sectoral approaches, such as the top runner approach, or instruments such as the energy performance certificate for buildings, could play a role in raising investment ratios, which are too low across Europe. However, as pressing ahead with individual sectoral activities will not get the job done, the mission statement of a Green New Deal at the European level continues to be strategically meaningful.
In the light of significant shifts in political mood in comparison to the acute crisis situation of 2008, the proposed European Investment Programme could be met with resistance both in terms of the economic policy approach and in terms of the strong role for the European political level. A more promising prospect would therefore be to tie in with the existing institutions, such as the six pack regulations or the activities of the European Investment Bank. Schick cited a number of potential (regulatory) approaches for promoting green investments:
• non-financial corporate reporting can play a key role in the future in making the green and social aspects of investment decisions transparent and more effective: the European Commission's proposal to harmonise these standards is a step in the right direction;
• corresponding private investment initiatives are meaningful but not essential;
• public (development) banks should be more active in facilitating the redirection of capital;
• by contrast, favouring green investments in financial market regulation could create new risks and/or fail to adequately regulate the existing ones;
• changes in corporate law could create the framework for companies shifting away somewhat from their exclusive focus on increased wealth – this especially holds true for companies that are largely publicly owned.
Panel Discussion: Sustainable Investment in Europe
The opening panel examined the need for and challenges facing sustainable investment in Europe. Andreas Botsch, Senior Researcher at the European Trade Union Institute, described a pan-European lack of investment in the real economy as a result of a balance sheet recession in the eurozone: in the aftermath of the financial crisis, the private sector was the first to raise its savings significantly, after which public-sector budgets also embarked on a massive savings drive. As a consequence, not even the huge injections of capital from the central banks could do much to influence bank lending: only 31 per cent of all European bank activities currently relate to loans for companies and private households. Bank regulation in the aftermath of the crisis is having no significant bearing as it does not address the composition of the portfolios. One possible means of dealing with the resulting excess liquidity is to set up a public equity programme, as envisaged by the DGB's "Marshall Plan for Europe": this could collect a portion of the existing investment capital and channel it into the real economy through direct investments or lending. Such a public equity programme could be financed through taxes and a capital levy.
Karsten Löffler, Managing Director of Allianz Climate Solutions GmbH, underscored the following: that, whilst in absolute figures, investments needed for a green transformation in Europe were high, additionally required investments, for example for the energy turnaround, stood at a mere ten percent of the reference scenario for the energy sector; that it is vital to factor the entire system costs into the calculation as these are significantly lower for renewable energy than for the production of energy using fossil fuels; and that the political framework plays a crucial role in the amount of capital expenditure that is required as well as the overall costs. Engaging major investors more heavily in the green transformation firstly requires having a transparent, long-lasting and reliable political framework; and, secondly, incentive schemes that are readily accessible for mainstream portfolio managers.
- Climate bonds could play an important role in the long run: the market has grown significantly and is creating high interest among investment banks; in addition to development banks, both the corporate sector and municipalities are actively engaged.
- Capital market indicators can equally play an important role: since these have, more than anything, been a reflection of market capitalisation up to now, they are, in contrast to the national economy as a whole, creating a preference for companies and sectors of the fossil fuel industry. The debate on whether and in what way these indices can and should be adapted has only just begun.
Ana Belen-Sanchez, International Consultant for Green Jobs/Sustainability emphasised that Spain has a fundamentally sound framework for a green economy, for example in the shape of highly skilled workers. Over the past few years, however, the green transformation has been slowed by weak environmental regulation and incisive public expenditure cutbacks. Added to this, EU regulation, which, until now, had been a major source of stimulus for Spain's environmental policy, has become less of a motivating force. Fundamentally speaking, Spain has sufficient capital to finance the green transformation: when it comes to sustainable investments in pension funds and other major investors, however, Spain lags well behind other European countries, and up to two-thirds or more of all investments made by Spanish companies in the environmental sector leave the country due to the incentive schemes that exist abroad. From a political standpoint, it is therefore crucial that similar sectoral regulations and incentive schemes are set up in Spain.
Workshop 1: Reforming the Financial System to Make it Serve the Real Economy
The first workshop of the day looked into the outlines of a financial system for the real economy. The discussion was initiated by Greg Ford, Head of Communications at Finance Watch, and Thomas Fricke, Senior Researcher at the European Climate Foundation. The workshop was virtually unanimous in its assessment that a relative decoupling of the financial and real economy had occurred: this can be observed in the strong growth in bank transactions (most notably in derivative trading) compared to the real economy as well as in the increasingly shorter holding times of stocks and shares.
The boundary between the real and the financial economy
However, the workshop also cited the difficulties involved in distinguishing clearly between speculation and productive investment: even derivative transactions, a frequently-cited prime suspect for speculative activities, in some cases at least satisfy the functions of the real economy. One remedy might be a type of financing footprint, which measures the financial impact of various asset categories in the real economy. The participants emphasised that there was a lack of credible data in this area and that, accordingly, there was a need for more research here. In this regard, Greg Ford stated that, to begin with, he was counting on initiatives being successful that pressed for a more widespread publication of bank balance sheets showing these asset categories. In the opinion of Thomas Fricke, the mere fact that there is no clear-cut differentiation between speculation and productive investment did not justify establishing any regulatory differences, for example in the shape of higher equity ratios for speculative transactions.
The participants were clear on the following: the stabilisation and also the deceleration of the financial system would, in principle, have a positive impact on the financing of the real economy. However, the concrete proposals for doing so are also a direct reflection of the dichotomy that exists here: the financial transaction tax or a higher equity ratio are, in the opinion of many experts, suitable instruments for curtailing speculation races and the creation of new bubbles. This is met, at the other end of the scale, by strong resistance from the financial sector itself as well as the widespread concern that such forms of regulation weaken one's own financial centre.
Long-term financing of the European economy
Standing shoulder to shoulder with the re-regulation of the financial system as a macro level are concrete measures as a micro level that seek once again to better link the financial system and the real economy. One vital impulse in this debate has come from the European Commission with its long-term financing agenda for the European economy. In this regard, Greg Ford emphasised the discrepancy that exists between an initial green paper addressing the entire scope of capital market regulation, ranging from equity ratios and liquidity regulations to pensions and taxes, and that also contains the first recognition that structural factors in regulating the banking system hamper optimum capital allocation for the real economy; and between the as-yet rather small-scale initiatives of the Commission, such as a Long-Term Investment Fund (LTIF), that bundles retail funds and, at the same time, seeks to combine security for investors with greater influence on how money is used.
Opportunities and risks of micro-management
Opinions on this type of micro-management are divided. On the one hand, some participants highlighted the positive examples such as SME bonds, which could also prove to be an effective remedy in Europe's crisis countries. Other participants reiterated that instruments such as securitisation were elementary in triggering the financial crisis. Greg Ford also believes that a return to the securitisation debate serves the interests of certain actors wanting to use targeted financial instruments specifically for SMEs. However, he also warned that micro-managing capital in this way will always also lead to unwanted side-effects such as misallocation and, accordingly, a primary reliance on macro-managing the financial system in order to increase investments in the real economy.
Thomas Fricke shares this establishment of priorities, but also cites an area where a certain degree of misallocation will also be necessary in the future: in the fields of environment and climate, numerous developments would not have been possible without initial subsidies or stimulus investments. Germany is the perfect example of this. It is an undeniable fact that it would have been better to input fewer subsidies as a result of the Renewable Energy Act. However, e-mobility would not be able to function without them, because it has yet to be seen whether the industry itself will provide the investments required to build up the infrastructure. A portion of the required investments could be derived from tax revenue from the financial system.
Workshop 2: Green Investment
In the second workshop of the day, Karsten Löffler and Gerhard Schick discussed with Stanislas Dupré, Director of the 2-Degrees Investing Initiative, the pros and cons of various forms of direct influence on investment decisions aimed at increasing the contribution made by the financial sector to the green transformation.
The first of these areas is the short-term nature of investment activities. This also concerns numerous intrinsically long-term oriented actors such as institutional investors and is, to a large extent, not beholden to third-party constraints, such as liquidity regulations, but to the organisation of the investment process itself: portfolio managers frequently prefer shorter-term, more liquid products, and, in many cases, company evaluations fail to extend beyond a period of a few years. How can this situation be changed? Karsten Löffler does not believe that there is a quick fix, adding that a general redirection of capital must start with longer-term parameters. However, the need to optimise the ratio between the return on investment and risk leads portfolio managers to make buy-and-sell decisions that initially have nothing to do with the short- or long-term nature of the underlying investment.
Ultimately, argues Löffler, the short-term horizon is not the core problem but rather the issue of which criteria are applied in order to reach the decision to invest: this is made clear through the example of the – still largely unresolved – question as to how the abstract problem of climate change can be sold as a discount in the decision to invest. Gerhard Schick also perceives a lack of suitable regulatory responses to date. Only bonus payments have thus far succeeded in affording the long-term perspective greater consideration. A more comprehensive response could be to identify segments within the capital market that are not subject to short-term sales pressure and that can, here, have a regulatory effect on long-term investments: one such segment could be pension schemes, with Sweden being the role model. As a matter of principle, the long-term nature should be incorporated into financial market regulation more systematically, because parts of the re-regulation in the aftermath of the crisis might even give rise to incentives that go in the wrong direction, such as the adjustment of the liquidity coverage ratio.
A second, significantly more direct point of intervention is to issue green or climate bonds – a step that has been undertaken by numerous public-sector (development) banks over the last few years. The EU Commission has also shown an interest in expanding the market. In the opinion of Karsten Löffler, this is a promising means of creating incentives for investors and of bundling activities such as investments in energy efficiency, which, individually, are not of interest to institutional investors due to their size. This, in turn, requires having organisations with the corresponding expertise in order to bundle the individual activities. This is where banks could come into play. For Gerhard Schick, green bonds are not the definitive answer to the needed financing for the green transformation, but he does not perceive any disadvantages through the commitment of public-sector banks either. In terms of their own refinancing, it is irrelevant whether they issue green bonds instead of standard bonds. However, the positive effect could be a growing, more visible market for green products. On the down side, he views incentives for purchasing green bonds, for example through tax or financial market regulatory exceptions, with scepticism because this could lead to the creation of a new bubble.
A third launching pad for promoting green investments can be found in capital market indices. The presently used indicators are largely geared towards market capitalisation and thus favour large companies that are more frequently found in the fossil fuel, banking or mining sectors. By contrast, green ventures are structurally under-represented in the portfolios of major investors due to their, on average, smaller size. Karsten Löffler asks to consider that, whilst this correlation exists, every alternative index is always compared with the mainstream indicators and therefore could not have any decisive impact on investment decisions. Gerhard Schick also believes that legislators have few opportunities to intervene in an area that has primarily resulted from private-sector interaction. The exception to this rule are public-sector banks which could be bound more comprehensively to green indicators. Overall, however, this core area of investment decisions illustrates just how far green transformations will, in future, also be linked to a conscious, entrepreneurial initiative. In this context, the participants equally underlined that green funds and companies had also moved forward despite the dominance of the mainstream indicators, which largely has to do with the existence of various asset categories: new investments in renewable energy sources, for example, occur in a segment in which mainstream indicators do not play a role.
The final means of leverage is therefore to use labels for green investment products. The issue has been driven by numerous actors for many years, but has equally posed difficulties in terms of definition and differentiation. Gerhard Schick believes that, although these labels are meaningful for the private investor segment, they will not play a decisive role in the green transformation. Given the complexity of the issue, a uniform label would be of importance, ideally at the European level. However, several participants agree that such labels will have virtually no impact on the decisions made by major investors.
Furthermore in our symposiums' documentation:
Speech by Thierry Philipponnat, Secretary General of Finance Watch: "Reflections on Long-Term Financing".
Publication
Money for Change - The financial sector in the green economic transformation
by Green European Foundation in Cooperation with Heinrich-Böll-Stiftung
Date of Publication: September 2014
Number of Pages: 64
License: CC-BY-NC-ND
