Wolfgang Kuhn is an independent consultant who advises on sustainability-related matters in a financial market context. Previously, He was Director of Financial Sector Strategies at the London-based research and campaigning group ShareAction. Before joining the civil society sector, Wolfgang spent 20 years analysing and investing in corporate and government bonds.

Praveen Gupta: Much of the climate breakdown discussion centres around carbon. Biodiversity is not on the radar?

Wolfgang Kuhn: Well, I think it has arrived on the radar, looking at The Taskforce on Nature-related
Financial Disclosures (TNFD), Partnership for Biodiversity Accounting Financials (PBAF) and other initiatives. But it is much more challenging to deal with, as location is a crucial element, which isn’t the case for carbon. Also, you can’t use the I-wish-we-had-a-carbon-price excuse for inaction because pricing biodiversity is impossible. Not that people aren’t trying, but I think it is the wrong approach.

PG: Is the financial sector absolving itself by pushing the buck back to governments?

WK: A resounding yes. Of course, and without a doubt, governments have a primaryficant role here. But we won’t get very far if we go with the entrenched view that businesses must profit-maximize and governments to set the rules. Corporations now make decisions that are too systemically relevant and far-reaching to allow them to push all responsibility towards governments.

PG: Is Too-Big-To-Fail (TBTF) making big finance complacent? Do they know central banks will bail them out? Did Alan Greenspan set a bad trend?

WK: It is not TBTF in terms of large individual financial institutions but also the whole financial market. Central bank policy over the past quarter of a century (Greenspan put, Bernanke put, QE, asset purchase program this, asset purchase program that) has prioritized the stabilization of the financial system over anything else. Asset price inflation is outside of the mandate when stock prices are going up, but when stock prices are going down, deflationary pressures are cited to justify accommodating policy. I would argue that central bank policy is the single biggest reason why sustainability risks are neither priced nor taken seriously.

Everyone knows full well that the financial system has been allowed to become so over-levered that central banks can’t tolerate any half-significant asset price drop without risking the dominos to start falling. So why worry about stranded assets? Systemic issues are irrelevant because they are taken care of. By the time central banks can’t help any more, you will have left too much money on the table if you didn’t invest in systemic risks. Maybe this is also a reason for the ESG pushback: it isn’t apparent why the systemic risks we are facing are dangerousous to people’s portfolios.

“The standard argument is that business should be allowed to make profits at all costs and that it is for the state to set the rules.”

PG: Public companies have become very big and assertive. And PE companies are free for all modes at private companies. Isn’t this corporate capture in play?

WK: Yes. The standard argument is that businesses should be allowed to make profits at all costs and that the state should set the rules. But then business helps set the rules through outsized influence. Honi soit qui mal y pense (“shame on anyone who thinks evil of it”).

PG: Would you agree stewardship is in crisis?

WK: Looking just at how executive remuneration has developed, I am minded to argue that stewardship has never worked. And it appears the system is built against shareholders exerting their will. Of course, investors can tell management individually, but they are bound to be ignored. Or they could do so in a coordinated fashion, but someone will inevitably say it is against the law.

That is why collaborative engagement platforms are ineffective: they cite the risk of being seen acting in concert, or anti-competitively as a reason for not coordinating their actions. So everyone is on their own. It is a convenient argument but also one that is very difficult to disprove.

If groups of shareholders aren’t permitted to form a view together, we are in a similar situation to those of autocratic political systems: people might still get a vote, but if they are not permitted to coordinate and form parties, voting results become what those in charge of matters want. Autocrat governments always get the votes. (Okay, maybe comparing CEOs to autocratic leaders goes a bit far.)

Now, that may just work fine for companies and their shareholders on a day-to-day basis: Why care how much shareholders leave on the table? But when we come to systemic issues, CEOs ignorant of systemic threats (the persistent academic argument that management knows best is highly questionable) need direction. However, directing is only possible if shareholders can express a common view. At least, that is what we are told, and everyone is happy to play along. So, who controls corporations if shareholders aren’t able to do so? Corporations control themselves. Go figure.

PG: Not only is climate risk becoming more immediate, but it is also systemic and likely to manifest as #polycrisis?

“If you care about the world, you don’t bother figuring out how much of the ‘carbon budget’ is yours.”

WK: People are going about whether portfolios are aligned with this or that scenario—a pretty irrelevant exercise, mostly used to justify the status quo. If you only care about financials, then you focus on the immediate future and discount anything beyond ten years in the future—no scenarios needed. If you care about the world, you don’t bother figuring out how much of the ‘carbon budget’ is yours. You accept that ANY further warming is going to have terrible effects, and you try to cut your negative impact as fast as possible—no scenarios needed.

PG: Has sustainable finance lost its way?

WK: Sustainable Finance is busy convincing everyone that it is all about financing ‘solutions’ and about financing ‘impact’ all about financing green. Greening finance is discounted as something unscientific. Worrying about financing pollution is unscientific. Not investing in fossil fuels has no effect on the world. Refraining from investing in economic activity that involves child labour is ‘value-based’ but not impact-generating. So they say.

PG: Isn’t ESG getting boxed in the disclosure space?

WK: No. That seems to become common sense, but it isn’t true. Of course, everyone knows what should be done without any more disclosure. Unfortunately, though, no one will do anything without more disclosure.

If you have a problem with disclosure, why is that? If box ticking is your answer, than tell me: do you think that pilots should do box-ticking before they fly, or do you prefer they follow their gut instinct?

Of course, disclosure is not sufficient to get action. But I would argue that it is pretty much a necessary condition.

PG: Many thanks, Wolfgang, for your trademark crisp and candid insights!