During the second annual Sustainable Investing Forum, EHL Hospitality Business School hosted industry players to discuss the state of sustainable finance. A wide range of topics was addressed, and salient discussions centered on the reality of incorporating economic, social and governance (ESG) criteria into investment decisions. Industry players, including pension fund managers, academics and doctoral students, elucidated current issues surrounding ESG investing.
The courts as a way to fight climate change
The day-long event, held on June 10, was kicked off by two students pursuing their PhD. From EPFL, Alice Eliet-Doillet discussed her dissertation, which looks at the impact climate lawsuits have against firms. When litigation is brought against a firm, her research shows that sophisticated investors pick up on this information, and the firm makes subsequent changes to its corporate policies.
This can include divesting assets that pollute, such as power plants. Lawsuits reveal, according to her findings, the climate risks to which a firm is exposed. However, only about 50 such cases have been brought before the courts in the United States since 2012.
Is sustainable investing a mirage?
For economists, public policy is the best way to resolve societal issues, such as climate change. This sacrosanct principle is taken for gospel, but Anna Vasileva, a PhD candidate at the University of Zurich, challenged the assertion that the rise of sustainable investing (SI) is unquestionably the best way to resolve climate change.
Does SI crowd out support for individual political solutions and regulations? Her findings dispelled this notion: “the option to invest climate-consciously does not crowd out individual political engagement or costly efforts to advance formal policy”. It is not—as SI is sometimes derided—a “dangerous placebo”. The participants in the room would have more to say on that subject as the day progressed.
Family firms pollute less
Transitioning to the event’s academic session, Nicolas Eugster, currently with the University of Queensland but with roots in the University of Fribourg, examined the relationship between family firms and carbon emissions. He defines family firms as companies where the founder or a member of the founding family is either a director, an officer or a holder of more than 5% of the firm’s equity.
He reminded participants that family firms account for half of global GDP and two-thirds of employment in the world. They also pollute less than other firms, indeed 10% less. This gap has widened since the 2015 Paris Climate Accord. Why? The paper’s conclusions were somewhat…inconclusive. Governance structure (e.g., board characteristics) as well as Research and Development (e.g., green patents) seem to play a role. Dr. Eugster opened the floor to solicit ideas about what could be causing this relationship.
M&A can stir stakeholder contention
This year’s event perfectly reflected the linguistic balance in Switzerland. From the Università della Svizzera Italiana, Ana Kurtanidze, examined stakeholder reactions to merger and acquisition decisions. When a firm takes over another firm, stakeholders are often harmed (e.g., layoffs, the value of investors’ holdings is watered down, etc.), and they sometimes speak out in the media or through boycotts, protests, etc.
This often leads to broader scrutiny as the firm’s day-to-day operations are put “under a microscope”. This unwanted attention can lead to consequences that are far more serious than the initial issue (i.e., the hostile takeover). Her paper also cites examples of when a takeover is positively welcomed by the subsumed company and its employees.
Pessimism reigns: Rosy ESG ratings, greenwashing, overcapitalization
The Sustainable Investing Forum, organized by finance professors at the EHL Hospitality Business School, handed the floor to three keynote speakers, who struck a more negative tone with regard to SI. Dr. Laurent Frésard of the Universitá della Svizzera Italiana asserted that green firms already receive sufficient volumes of capital and that more doesn’t make them any greener. When the market reduces the cost of capital for green firms and increases that of brown firms, this creates a ‘wedge’ or greenium.
According to his research, a “greenium” (albeit a very small one) does indeed exist. However, investment managers do not perceive this greenium. Dr. Frésard cited the example of a classic capital allocation dilemma: renovating an old building or constructing a new, greener one. Installing a heat pump or double-glazing windows may not be as flashy (or marketable) as a new building, but it is more effective. He asked participants rhetorically: “What is more important to firms: having an impact or patting themselves on the back?”
ESG is “worse than doing nothing”
Dr. Kornelia Fabisik of the University of Bern added a Swiss German accent to the day’s proceedings. The title of her presentation was blunt: ESG ratings are worse than you think. Human beings, she stated, like easy solutions. ESG is an overly simplistic, one-size-fits-all solution to an extremely complex problem, she said. Listed companies can sell their emissions to private equity firms and thus boost their ESG scores in one particularly egregious example.
Again, instead of closing their dirty assets, such as power plants, firms can merely sell them. This contributes to the “ESG mirage”. She cited the 11-15% drop in emissions after the 2015 Paris Agreement, but this was because of divestment, not cleaner business activities. Unlike the CDS market (credit default swap), there are no market-based consequences for erroneous ESG scores.
Dr. Fabisik exclaimed: No one says, “Hey! Those ESG scores were way off! There must be consequences!” and the firm gets off scot-free. Better datasets, simplification of ESG criteria, and governmental regulations are some ways the ESG rating process could be improved, although it is a “tricky situation”, she admitted.
Greenwashing is the new norm
Hailing from the University of Lausanne, Dr. Garen Markarian, the most local of the presenters, sounded equally pessimistic as he enthusiastically launched into his presentation entitled “Can we stop greenwashing?”. He attacked the sources of the information that constitute ESG ratings, which include firms’ annual reports, less-than-thorough ‘audits’, etc. Moreover, when asked about their methodology or sources, ESG raters hide behind the cloak of corporate secrecy.
Dr. Markarian went on to list particularly unsavory examples of corporate hypocrisy, including oil giants (BP, Exxon, etc.) that were forced to walk back climate pledges (e.g., zero carbon promises, etc.) after purchasing shale oil producers (i.e., “frackers”) for billions of dollars. To finish, he implored asset managers to be skeptical with regard to so-called audits that “attest” to corporate claims of being green.
Finishing with wine
Fear not! The daylong event finished on a high note. The guest speaker for the closing session was Matt Goldklang, a climate scientist at Man Group (an alternative asset management group), who joined the conference from New York City via Teams. His work consists in identifying areas around the world that are at risk of extreme weather events. A wine enthusiast, he has identified wine-producing regions, including northern Italy and wide swaths of France, that are particularly vulnerable to drought while others have higher ‘adaptive capacity’.
Befitting a hospitality-oriented institution, the event concluded with a wine tasting where two reds from the same winery (in Switzerland’s Valais canton) but from different vintages were tasted (the 2021, which was a cool and damp year, was pitted against the 2022, a hot and sunny growing season).
Participants were asked which differences they could taste in the two vintages. As Mr. Goldklang said, “Wine is a record keeper, memorializing time (i.e., weather conditions during a particular year) and space (i.e., a vineyard’s specific terroir). Both time and space are stored in the flavor of the wine.”
Held on EHL’s Lausanne campus, the 2024 Sustainable Investing Forum was the perfect occasion for participants to take a day to have a frank discussion about the latest in responsible investing: what is working and, perhaps more importantly, what is not.
Translator & Content Editor at EHL Hospitality Business School
Associate Professor at EHL Hospitality Business School
Associate Professor at EHL Hospitality Business School
Associate Professor at EHL Hospitality Business School
