Roman Kräussl is professor of finance at the University of Luxembourg and a visiting fellow at the Hoover Institution, Stanford University. He studied economics at the University of Bielefeld and received his PhD in financial economics at the Center for Financial Studies (CFS) at Goethe-University in Frankfurt. He is also involved in HSBC's ESG Square initiative.

His research focuses on alternative investments, including private equity and infrastructure.

ESG issues are not new to him. A quarter of a century ago, he focused a part of his doctoral studies on sustainability. This was in the period of what could be termed the first wave of awareness on the issue which began at the UN Conference on Environment and Development (UNCED) in Rio de Janeiro, Brazil, in 1992. Since then, the concept of sustainability has struggled to establish itself as a new socio-economic paradigm.

In the Kyoto meetings in 1997, he analysed existing carbon trading models, identified the minimum conditions for sustainable development and co-developed a macroeconometric model, which included the measurement of energy and material consumption, and which was well adapted to indicate the link between economic development and environmental impact. “A macroeconomic model without too much finance in it.” 

“I found that there was a tradeoff between economic growth and jobs on one hand and environmental concerns on the other. Nevertheless, sustainable tradeoffs were possible. It was therefore extremely frustrating that in the years that followed, the topic of a sustainable economy was only discussed, but not acted upon.”

Kräussl then distanced himself from the subject and devoted himself to--amongst other issues--gender in the financial markets. It was through this ESG approach that he “reconnected” to the topic of sustainable development with a focus on greenwashing, e.g., of investments.

To be relevant in research, especially in the field of sustainable finance, you have to position yourself in a niche, says the economist, “be unique and address the big question that no one has really addressed yet.” What is that issue? The fact that ESG measures are largely based on the statements that companies make. And it is on this basis that the market assesses companies' exposure to ESG risks and opportunities. An intellectually unsatisfactory bias that is further compounded by the lack of widely accepted standards defining a company's ESG profile. In short, the door is open to marketing, abuse, greenwashing and rating shopping.

“A high ESG rating is not enough to declare that a company, investment fund or infrastructure project is green or good,” says Kräussl.

The goal is primarily to identify the fundamental impact on a company's sustainability through the products and services it offers according to the dimensions of the 17 UN Sustainable Development Goals; to assess the extent of divergence between companies' self-reported sustainability practices and assessments of their fundamental sustainability; and to evaluate the sustainability footprint of exchange-traded funds (ETFs). In other words, provide a framework for integrating sustainability metrics into the evaluation and risk assessment of listed and private assets.

To achieve this goal, the project will certainly rely on companies' financial and non-financial reports, standardised rating data--with all the caveats mentioned--and non-public datasets that do not rely on self-reported data, such as those provided by the UTIL association, which looks at things at the product level and is able to determine whether a product is greener than an equivalent competitor product. Other data would come from the academic sector. Machine learning technologies will also be used to refine the analysis of the actual green potential of a company, fund or infrastructure project. 

The tasks will be carried out in collaboration with Denitsa Stefanova of the University of Luxembourg.

“My goal is that my research contributes to greater transparency in the sustainable finance market, which will bridge the gap between artificial and real concerns for the environment,” says Kräussl, who hopes to go further by developing a dynamic ESG investment tool in parallel. “With this tool, an individual or institutional investor could choose his or her ideal green asset allocation, based on how much E, S or G to support, while keeping in mind the risk and return features of the investment.”

This research will be an asset to the country and the Square he believes. “We are working on a tool that will allow us to identify true sustainable finance.” 

This article was originally published on Paperjam and has been translated and edited for Delano.