[LUM#14] Green Bills
The University of Montpellier is the first in France to offer a in green finance. While to the general public the concept may seem like an oxymoron, the financial sector could very well be a key player in the ecological transition. We discuss this with Adrien Nguyen-Huu, a researcher at the Center for Environmental Economics in Montpellier* and co-director of this groundbreaking program.
To begin with, where did this concept of green finance come from?
It’s a topic that emerged very quietly in the 2000s, in the context of climate negotiations, but it really took off in 2015 with the Paris Agreement and then in 2017 with the One Planet Summit that banks stepped into the spotlight as a sort of conduit for public policy.
A stepping stone to what?
Over the past five years or so, awareness of climate risk has grown within the financial sector. At the same time, citizens and climate stakeholders have grown frustrated with international and national public policies, which they view as lacking ambition or moving too slowly. Investment banks have thus emerged as key players capable of influencing the reallocation of large volumes of savings, while retail banks are a primary source of investment in green projects.
But what incentive do banks have to invest in green initiatives?
Let’s set aside the branding efforts—which obviously exist. Investing in green assets allows banks to diversify their portfolios. The climate crisis is so slow-moving that by the time its first effects appear on banks’ balance sheets, it will already be too late to protect themselves. Insurance companies were the first to realize this and to declare that a world 4°C warmer is uninsurable. The financial sector is no exception: which investment sectors hold the future? Investors are, in principle, fairly indifferent to whether they’re investing in yogurt containers or nuclear power plants. If the markets anticipate a risk, investors cannot ignore it and will react very quickly—even if their investment horizon is reputed to be short.
What types of risk are we talking about?
First, there are physical risks, which are the actual events to which institutions may be exposed (rising water levels, extreme weather events). Next, there are transition risks, which are linked to public policies and regulations aimed at curbing climate change and that could lead to a decline in the value of the assets held by banks. Imagine this: you have Total in your portfolio, and suddenly the company is banned from exploring certain areas of the world. Total’s value is cut in half, and your portfolio plummets. A transition that occurs too rapidly can therefore lead to financial instability or even an economic crisis.
So, in practical terms, how can the financial sector take action to combat climate change?
There is already a range of financial products (stocks or 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… But the main challenge is identifying climate-beneficial activities through a taxonomy and labeling system, while also making it possible to assess the future economic viability of those activities. Both of these tasks are immense.
And are the financial markets following suit?
There is a vast amount of savings available for the transition, yet—for reasons of return—these funds continue to finance the carbon-based economy. However, non-financial environmental and social considerations are raising awareness among a significant segment of investors, whether in anticipation of regulations or out of conviction. Central banks also appear to be playing an increasingly important—though still uncertain—role 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 a rigorous taxonomy and international standards defining “green” sectors, greenwashing is always a possibility. This is one of the levers for public action in finance, as the European Commission recently demonstrated. Conflicting views on these “green” sectors complicate the task: the opposing stances 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 divestment from “brown” sectors (coal, oil) is carried out reluctantly, as high returns remain attractive.
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 well-understood interests cannot be based on a purely virtual economy. Economic viability is not logically incompatible with environmental sustainability; there is a middle ground to be found. That said, climate change requires a shift in mindset that cannot happen solely within the financial sector, but one thing is certain: given the sector’s importance, it cannot happen without them. Behind all this lies a long-term ideal: putting finance back in its proper place—that is, in the service of society rather than in the service of itself. The success of the university certificate program among students proves to us that the idea is taking root among the younger generations.
Greener than a golden boy
He describes himself as the “product of the financial crisis that occurred between 2007 and 2008.” At the time, Adrien Nguyen-Huu was beginning a doctoral thesis in financial mathematics at EDF. “The crisis gave new meaning to the way I wanted to approach finance, and I shifted 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 —“that is, what happens if the economy has access to less energy or lower-quality energy.” More recently, Adrien Nguyen-Huu, along with his colleagues at CEE-M, has ventured into behavioral finance. He is also an associate researcher with the Energy and Prosperity Chair.
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*CEE-M (UM —CNRS—INRAE—Montpellier SupAgro)