[LUM#14] Greenbacks
The University of Montpellier is the first in France to offer a degree university degree in green finance. Although the general public may consider the concept seem like an oxymoron, the financial sector could well be a key player in the ecological transition. Explanations with Adrien Nguyen-Huu, researcher at the Montpellier Center for Environmental Economics in Montpellier* and co-director of this unique program.
First of all, where did the concept of green finance come from?
It's a topic that emerged very quietly in the 2000s, around the time of the climate negotiations, but it really took off in 2015 with the Paris Agreement and then in 2017 with the One Planet Summit , that banks came to the fore as a kind of relay for public policy.
A relay for what?
Over the past five years or so, the financial sector has become increasingly aware of climate risk issues. At the same time, citizens and stakeholders have become frustrated with international and national public policies that are considered unambitious or too slow. Investment banks have emerged as players capable of acting on large volumes of savings to be reallocated, while retail banks are a key source of investment in green projects.
But what interest do banks have in investing in green initiatives?
Let's put aside the branding work, which obviously exists. Investing in green assets allows for portfolio diversification. The inertia of the climate crisis is such that by the time its first manifestations appear in banks' balance sheets, it will already be too late to protect against it. Insurance companies were the first to realize this and to assert that a world at +4°C is not insurable. Finance is not far behind: what are the investment sectors of the future? Investors are, in principle, fairly indifferent to investing in yogurt pots or nuclear power plants. If the markets anticipate a risk, investors cannot ignore it and will react very quickly, even if their anticipation horizon is reputed to be short.
What types of risk are we talking about?
First, there are physical risks, which are the materialization of disasters to which institutions may be exposed (rising water levels, extreme events). Second, there are transition risks, which are linked to public policies and regulations that attempt to curb climate change and may lead to the depreciation of assets held by banks. Imagine you have Total in your portfolio and suddenly they are banned from exploring certain areas of the world. Total's value is halved and your portfolio collapses. Too rapid a transition can therefore lead to financial instability or even an economic crisis.
So how exactly can finance help the climate?
There is already a range of financial products (stocks and bonds) that have a positive impact on the climate, and of course many activities that should benefit from credit facilities: resilient agriculture, building insulation, carbon-free transportation, etc. But the main challenge is to identify climate-friendly activities through taxonomy and labeling, while enabling the future economic viability of the activities concerned to be assessed. These are two huge tasks.
And are the financial markets following suit?
There is a huge amount of savings available for the transition which, for reasons of return, are still financing the carbon economy. But non-financial environmental and social considerations are raising awareness among a significant number of investors, either in anticipation of regulations or out of conviction. Central banks also seem to have a growing, but still uncertain, role to play in climate action, through regulation and their influence on the banking sector.
How do we determine whether an asset is green or not? It's easy to engage in greenwashing...
Without rigorous taxonomy and international standards defining "green" sectors of activity, greenwashing is always a possibility. This is one of the levers for public action in finance, as the European Commission recently demonstrated. Conflicting visions of these "green" sectors make the task complex: the opposing positions of France and Germany on nuclear power are a prime example. There is also an unacknowledged asymmetry: institutional investors and banks are proactive in their green investments, but they are reluctant to divest from brown energy sources (coal, oil), as the high returns are still there.
Isn't it utopian to want to reconcile finance and ecology?
I'm not saying that banks are going to shoot themselves in the foot out of concern for the environment, but their best interests cannot be based on a purely virtual economy. Economic viability is not logically incompatible with ecological sustainability; there is a middle ground to be found. Climate change requires a shift in thinking that cannot happen in finance alone, but one thing is certain: given the importance of the sector, it cannot happen without them. Behind all this lies a long-term ideal: putting finance back in its place, i.e., at the service of society and not at the service of itself. The success of the university diploma among students proves that the idea is taking root among the younger generations.
Greener than golden boy
He describes himself as a "product of the financial crisis that occurred between 2007 and 2008." At the time, Adrien Nguyen-Huu was starting a thesis in financial mathematics at EDF. "The crisis gave new meaning to the way I wanted to approach finance, and I moved from financial mathematics to economics in the broader sense, " explains the researcher. Having become an expert in macroeconomic modeling, he turned his attention to environmental issues and became interested in the impact of productivity constraints , "i.e., what happens if the economy has access to less energy or lower-quality energy." More recently, Adrien Nguyen-Huu and his colleagues at CEE-M have ventured into behavioral finance. He is also an associate researcher in the Energy and Prosperity Chair.
Find UM podcasts now available on your favorite platform (Spotify, Deezer, Apple Podcasts, Amazon Music, etc.).
*CEE-M (UM – CNRS – INRAE – Montpellier SupAgro)