When discussing sustainable finance, “we should not forget about the finance part,” according to Michael Halling, chair in sustainable finance at the University of Luxembourg. Library picture: A pedestrian is seen in Kirchberg, 18 March 2020.  Photo credit: Matic Zorman

When discussing sustainable finance, “we should not forget about the finance part,” according to Michael Halling, chair in sustainable finance at the University of Luxembourg. Library picture: A pedestrian is seen in Kirchberg, 18 March 2020.  Photo credit: Matic Zorman

To make a long-lasting impact, sustainable finance needs to add sustainability onto existing financial systems, and not bolt finance onto sustainability, a leading academic has argued. The fifth in a five-part series.

Earlier this month spoke with Delano to mark the one-year anniversary of him taking up the post of sustainable finance chair at the University of Luxembourg. In previous instalments, he discussed , , and . In the final part of the interview, Halling shared his observations on the tensions between ‘sustainability’ and ‘finance’ in the field of sustainable finance.

Talk around sustainable finance is typically “dominated by the sustainability aspects,” Halling commented. “People want to save the planet,” which is obviously a worthy goal. But he would like to see market players “bring the finance back into sustainable finance, because otherwise, I think it’s just not gonna work.”

Prof Michael Halling, chair in sustainable finance at the University of Luxembourg. Photo credit: University of Luxembourg

Prof Michael Halling, chair in sustainable finance at the University of Luxembourg. Photo credit: University of Luxembourg

It is important for market players to remember that sustainable finance has two goals, not one. “In the term ‘sustainable finance’, there is sustainability. And then there’s finance. We should not forget about the finance part, in the sense of finance is an established field,” with decades of research into how markets work. “I think we should not abandon those [models] just because now sustainability is hip.”

When speaking with stakeholders, Halling said he stresses looking at what financial analysis would predict “how sustainability is going to affect, for example, performance or returns, because actually, we [financial scholars] have a lot of stuff to say about this. And I think we should discuss this openly, transparently, because otherwise, this transition towards more sustainable markets itself is not going to be sustainable. Because the investors have more expectations, for example, about necessarily having higher returns” or continually increased valuations.

Not always win-win

Other investors make fuzzy assumptions about their influence over corporate outcomes, he observed. “One of the most important questions is, if you can do well by doing good. [If] you can increase your financial performance by also investing in a sustainable way. And this obviously sounds great, right? It sounds like a win-win situation.” But the established financial knowledgebase “would tell you that it is not likely that this is going to happen. And it also means that if that were the case, if investors would invest sustainably, they would not have any impact on the real economy. So they will not drive out unsustainable firms,” Halling stated.

“In some sense, it’s not even consistent with [investors thinking that] ‘I want to have an impact through my investments. I would like to change the world, [so] then I have to give up returns, because I have to basically provide my capital to those good guys at a cheaper price than to the bad guys. I need to make the bad guys work harder, so that they think, hey, maybe I should not be a bad guy, because it’s really hard to earn these returns that all these investors require of me. So I should just become a good guy.’ If you think through these arguments, then it shows you that this idea that you can do well by doing good, it’s just not consistent with a transition towards more sustainable markets.”

Honest debate

“To make that claim, you have to bring the finance back in, because without the finance, that sounds like, you know, ‘what is he talking about?’ These are the kinds of debates and engagement that we would like to contribute to, and I think is needed so that in 5-10 years, we are really on the path to a real transition, where investors understand, ‘we would like to save the planet, so we need to support certain technologies or abandon other technologies. And that might mean that we’re gonna maybe give up a little bit of return, but for the benefit of saving the climate or supporting minorities’.”

Halling reckoned that: “you need to be transparent and objective about the ultimate goals. What is realistic, what is implementable. [And to then] make steps towards reaching them, rather than losing people along the way.”