Originally published on The Beam.
By Alexander El Alaoui
There is no denying that capital markets have an impact, one way or another. Think of the 2008 US housing collapse and its devastating effects on the population, or how money flows propel social inequality — just read Thomas Piketty — and speed up global warming — or Nicholas Stern. As a matter of fact, finance has burgeoned into a force which is beyond our control, reaching into all aspects of our life, where it expands and sets the rules for our society at large.
Now some may wonder how those with the upper hand in this game, the financial industry, are now trying to turn the tables and miraculously transform finance into a supposed vehicle for good (Google “ESG”). In fact, bankers have spared no effort to downplay the effects of financial crises and polish up their act so they can appeal to a new generation of customers, let’s call them the climate-savvy Gen X, Gen Y, Gen Z investing newbies, with well-sounding products, such as “fossil-free” or “low-carbon” investment funds.
“Sustainable” funds rank high to highest among those with the largest net inflows of fresh capital across many EU countries, including France and Germany.
Make no mistake, capital shapes a great deal of the world we live in, maybe much more so than politics. So it’s a good sign that the world of high finance wakes up and recognizes its responsibility towards the people and the climate. So much so that some of the world’s largest banks and insurance companies were among the early supporters of the Paris climate accord of 2015. Some of them even took part in the preceding negotiations and later announced that they would divest from fossil fuels in an attempt to satisfy the growing demands of climate activists for a “fundamental transformation of finance.”
Fast forward to today and you witness BlackRock’s chief Larry Fink pledging in Davos to take climate center stage in his group’s investments. Remember BlackRock? Yep, the seven trillion dollar investor that literally owns the whole world — statistically, BlackRock is invested into every publicly listed company, including those in the fossil fuel sector. That doesn’t quite match up with the expectations of the people in the streets, does it?
The company’s best sellers are exchange traded funds, or simply ETFs. ETFs are a fun, cheap and easy way to invest your money in as many countries, sectors and companies as you like, all at the same time, while still keeping an eye on the risks usually endured when investing. That way, index funds give you full market exposure by replicating the composition of any given benchmark, such as the German DAX 30 index, an imprint of the German economy.
For those setting up and “managing” all these funds — you do not need managers, algorithms do the trick — the climate crisis must feel like a pot of gold. All you need to do is to put some “fossil-free,” “low-carbon,” or “sustainability” filter atop your fund universe (index, benchmark, whatever) or, better still, simply rename an otherwise unchanged product, and consumers will pour millions in your direction.
You don’t believe me? Check out the “U.S. Vegan Climate ETF” (NASDAQ: VEGN), which was launched last year by Jersey-based Beyond Advisors IC. Jersey, which is known as tax-haven, is just off the coast of France. Their promise is that by investing $1,000 you avoid funding the slaughter of 13 animals a year, and it does not stop there, because all the companies listed in the index are also environmentally-friendly and help save the climate.
Sounds good, no? If you take a closer look at the fund’s composition, which is where all the hundreds of millions of dollars and euros flow to, you will find… Nothing. At least nothing that has the slightest to do with vegan or the climate. The top ten holdings include finance heavyweight Bank of America and tech giants Apple and Facebook.
Most ETFs are capitalization-weighted. This means that the index’ composition changes as the individual stock prices move up and down, in other words, the financial performance determines whether a company enters or leaves an index. “Sustainability” or “climate” criteria are a sort of add-on, a nice gimmick, at best.
But things are getting worse. According to the calculations by Frankfurt-based financial technology start-up right. based on science, investing into ETFs is equal to giving a damn about the planet. Here’s why: if every company in the world produced the same level of CO2 emissions as all of the DAX 30 companies do, the world would heat up to 4.94 degrees Celsius by 2050. Pretty daunting.
This is not to say that investing cannot help save the climate — quite the opposite. Global capital markets may well be the answer to alleviate the climate crisis and ordinary bank accounts could make all the difference. But it has to be done right, not the BlackRock way.
What if every single climate striker piled all their cash and put it somewhere where they actually can see it has an impact, wouldn’t that be an effective way to reduce global emissions? And the good news is, you don’t need to invest in some green-washed index fund, there are plenty of “actively” managed alternative funds.
But you need to invest. In Germany, only one out of seven invests, which means that far less than 20% realize the power money can have on the causes they care about. We have to change this.
Let’s form the United People of Climate Investing.
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