Companies remain torn between making socially responsible investments and meeting the short-term expectations of the stock market. But it's not all gloom and doom for green investors, especially in Europe.
Green investments have been rising steadily in recent years as investors seek to play a greater role in combating climate change.
Socially responsible investments grew by 34% to $30.7 trillion (€27.4 trillion) globally over the past two years. Europe continues to be the largest region for sustainable investments, which grew 11 percent to $14 trillion, according to the Global Sustainable Investment Alliance, a trade group.
However, the rise in sustainable investing has been hampered in part by short-termism in capital markets, which tend to judge companies more on their short-term financial performance than their investments towards ensuring a sustainable future.
Sustainable finance proponents rue that investors often miss the point that green investing can actually boost returns in the longer term as it essentially means investing in technologies or companies that are going to play an increasingly important role in the future.
"If you put yourself in the shoes of a real sector CEO, you are a little bit torn between your own business strategy that is long-term and the expectations of the stock market that fluctuates on a daily, weekly basis … that judges you on your quarterly, semi-annual and annual reports," Christian Thimann, the chief executive of Athora Germany, told DW. "I see many CFOs who feel under pressure because of this short-term stock market pressure."
Thimann, a financial sector veteran who chaired the European Union's High-Level Expert Group (HLEG) on Sustainable Finance, feels there is a need to reduce the negative impact of capital markets on long-term investment decisions of companies.
"People do not want to criticize the stock market. There is an anonymous investor community around you. They value your stock every day," Thimann said. "I see many analysts that are going long-term and are making long-term investments. But there are still many analysts who have a rather short-term perspective."
Thimann highlighted his concerns in the HLEG recommendations to the European Commission last year. The Commission, in response, came up with an action plan which included among other things the need to reduce the impact of short-termism in capital markets.
EU takes lead
The European Union has pledged to cut its CO2 emissions by 40% by 2030 as part of its commitments made under the Paris climate agreement and the UN Sustainable Development Goals. The bloc has said it needs around €180 billion ($201 billion) in additional investments every year to meet its targets — investments that it feels will not be possible for the governments to raise alone.
To bridge the shortfall, the EU has proposed a law to encourage private investments in green projects. The law, which will follow the 10-point action plan, is expected to come into force some time in late 2020.
"It's not about saving the planet. The planet would be fine," said Olivier Guersent, the director general of the European Commission's FISMA Directorate, which is responsible for EU's policy on banking and finance. "It's about saving us, the human beings," he said at a Bloomberg event on sustainable finance in Frankfurt on June 17.
The EU is expected to come up with a unified EU green classification system, the so-called EU taxonomy, to determine whether an economic activity is environmentally sustainable and to identify areas where sustainable investment could make the biggest impact. One of the legislations is expected to call on asset managers and institutional investors to focus on sustainability in the investment process and add to disclosure requirements.
"Europe's asset managers, with about $28 trillion under management, will be uniquely placed to steer capital flows toward sustainable investments as a result of EU proposals," Bloomberg analysts said, adding that they may enjoy a "competitive edge over counterparts outside the bloc, given an increased appetite for climate-change investing."
The analysts said their analysis showed that environmental, social and governance or ESG funds fare better in market downturns as they carry "less risk, with a mix of low-volatility and quality stocks implying room for long-term outperformance."
Role of central banks
Central banks, seen as anchor investors, are also increasingly coming on board to ensure that the financial system is resilient to the risks posed by climate change.
"Globally, central banks see that climate risks are severe financial risks," Sabine Mauderer, member of the executive board of the German central bank, Bundesbank, told DW. "Therefore, they came together and founded a network to address these risks," she said, adding that the idea was to have a platform to exchange ideas and best practices.
Bundesbank is the founding member of the network of central banks and supervisors to help foster a greener financial system. The network of 40 members and 6 observers issues non-binding recommendations to scale up green investments.
"Sustainable finance is one important way to deal with climate change. Therefore, I think it's about collaboration between financial industry, real economy and of course central banks and supervisors," Mauderer said. "We all have to work together to manage a shift from non-sustainable industries to at least more climate-friendly industries."