Financial Markets and Climate Protection - Between Overregulation and Too Much Freedom

You could almost smile at the phrase: “We meet our customers where they are.” Smile, because the phrase is hackneyed and probably causes amusement in every second bullshit bingo worldwide. But only almost, because the background is serious. The phrase was recently used by a US bank (Wells Fargo), which is scaling back its climate commitment: “We meet our customers where they are with their energy and transformation strategies.” Others are doing the same: it is well known that a number of US banks have already withdrawn from the Net Zero Banking Alliance (NZBA) and are therefore no longer following the path of ensuring that their lending is climate-neutral by 2050 at the latest.

Climate protection without pressure?

What does this mean for climate protection - from a value-free perspective? Almost all of the banks that have withdrawn still have decarbonization targets (e.g. JP Morgan) - so it will still be a matter of de-risking portfolios and aligning them with climate protection. However, they are no longer subject to the strict methodological requirements of the NZBA. Incidentally, it is rumored that the NZBA is now questioning itself and may be softening its rules. The NZBA is due to issue a statement on this in April.

EU is not necessarily at a disadvantage

And where does the EU stand from a value-free perspective? You need to know this: Non-EU financial markets such as London, Switzerland, Singapore, China and South Africa have even stricter rules for listed companies than we do. Overall, the competitiveness of EU financial market players should not be at stake in this respect. Not even if further tightening follows - the European Banking Authority's new ESG guidelines stipulate, among other things, that all banks will have to submit so-called transition plans for the decarbonization of their portfolios to the supervisory authorities from 2026/2027. They will also have to outline their commitment to ESG issues in the loan origination process (in addition to climate protection, this also includes the financial consequences of climate change and biodiversity).

CSRD is good for the market

We at agradblue, together with our entire group of companies, Westbridge Advisory, Magnolia Consulting and Quantrefy, are not fans of bureaucracy and overregulation - but conversely, neither are we fans of too much rollback of regulations that are or would be good for the market. For example, more than 200 players in the financial sector with assets under management totaling 6.6 trillion euros are currently criticizing the fact that rowing back on the issue of mandatory sustainability reporting (CSRD) is the wrong way to go. After all, the reports help to better manage risks and ultimately to better align capital through smarter decisions. At agradblue, we believe that things should work. In this case, that means that the interplay between financial markets and climate protection works. Because you can't have one without the other. Europe has taken the right path over the past ten years or so, with climate protection targets always in mind. In the real estate industry in particular, many owners have taken important ESG measures to make their CO2-intensive building portfolios climate-neutral. In addition to reducing emissions, there will also be an increasing focus on adaptation measures to make business models and the operation of real estate resilient and therefore profitable and, for example, to ensure the insurability of assets.

Conclusion and outlook

Overall, the market will be able to regulate a lot, whether in the USA, the EU, London, Switzerland or Singapore. The management of climate risks and active climate protection will remain relevant for this reason alone, as otherwise increased financial costs can be expected in the medium term - the damage caused by an increase in climate change significantly exceeds that of adaptation. There are countless studies on this. Investors of all kinds therefore have an interest in allocating their capital in the right direction. However, supportive regulation is certainly helpful - as is the framework for quantifying the corresponding risks. And that measures to reduce them become mandatory.