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The financial sector must raise the bar when it comes to greening our economy. So preaches
"I'm an optimist by nature, and see the glass as half full. But it could be fuller."
Whether she still believes in the idea of green growth? The theory that economic growth is possible within the earth's carrying capacity? At the mere doubt, Baarsma pricks up her ears and asks interestedly, "Why should I no longer support that?"
On the one hand, it is an unnecessary question, because Baarsma is unabatedly clear about it. Green growth was the theme of her previous book of the same title, published in 2022. Also in her most recent book "Sustainable Finance," which she wrote with economist
You state in "Sustainable Finance" that degrowth does not guarantee that we can save the climate. Guarantees are indeed tricky, but the theory sounds pretty logical, doesn't it? Moreover, you can't give such a guarantee with green growth, can you?
"Certainly not, but I don't claim that either. That is precisely the reproach that proponents of green growth get, that it does not guarantee staying within planetary limits. Our response then is that shrinkage doesn't give that guarantee either. For me, growth or shrinkage is not an end in itself, but a means to get within planetary limits. In our view, green growth has the greatest chance of success in this regard. First, because there is no electoral support for shrinkage. Calling for less consumption and production will only get people to vote against it. Also because important services such as health care, education and defense cannot be paid for in the event of shrinkage. And then you can never implement a greening agenda. And second, because with a growing economy you have the means to invest in greening technology. We desperately need that technology. Advocates of degrowth argue for a different economic system. However, it takes too long to change the capitalist system. It would take decades to change the system, even if it were possible. That's why I advocate green growth, where within the government-controlled market economy you put the incentives firmly on green."
Proponents of the degrowth movement claim, on the contrary, that the rollout of new technologies takes too long, and that in the process you remain trapped in a system of excessive consumption that is destroying our earth.
"True, you don't have everything done tomorrow, but you can start right away with permit requirements and zoning changes. You can increase carbon taxes, price nitrogen and water use more seriously. I think firm green legislation will trigger a huge creative capacity of producers, developers and scientists that will allow you to start a wave of greening technology. And as for that belief that technology is going to help us move forward, I'm very transparent about that. I don't know if it's going to be enough. But I do know that we've never really tried it. We've never put all the incentives on green. Let's try that now."
Taking responsibility
The financial sector has a huge role to play in this. First, because "gray" politicians (who do not have a green agenda) will start playing their sustainability policies through financial institutions. These politicians will also have to comply with international climate regulations, and out of fear of electoral punishment they will let banks, asset managers and pension funds do the work for them. But in addition, because the financial sector has a gold mine of resources to combat climate change. Be it in the form of green bonds, sustainability loans, investments or advice. But there are quite a few bumps in the road. For example, the costs of climate investments are high, while the benefits come much later. Also, the long duration of sustainable projects carries risks, and it is also uncertain whether certain climate technologies will actually pay off.
Perhaps the biggest problem is that climate risks are not sufficiently considered in investment decisions by financial institutions. The carbon emissions associated with an investment are secondary to financial returns, and often are not even considered. Effects such as the destruction of coral reefs or forest fires do not require a receipt in real life, while both phenomena can cause financial losses. Especially in the long run.
What grade would you give the financial sector when it comes to sustainability policies?
"I find that very difficult to say because financial institutions are so different from each other. Pension funds by nature look at the long term and can shift several billions from fossil to green investments in one go. In the case of banks that provide loans, the process is much more gradual. They have to wait for a loan to mature and only then can they make new commitments. So I find it difficult to answer your question in general terms, because with a report grade you're giving an average when it's all about those tempo differences within the sector. But I'm an optimist by nature, and see the glass as half full. But it could be fuller."
At
"The problem with green start-ups is that bank loans are not that suitable for them. We actually have too little diverse financing landscape in
Financiers must dare to distance themselves from their grey turnover, you write, without the green alternative being able to compensate for this loss. I can imagine that is difficult for them to accept. How do you intend to convince financiers that this is the best course of action?
"The financial sector is risk-averse by nature. That makes sense, because financiers are hired by society to manage risk. But they really need to recognize that they need to start coming up with green products. They don't have enough of those on the shelf right now. That includes de-risking, such as divesting financing to coal producers and users. That will indeed mean a dip in certain sales. Face this, and engage with shareholders. Explain that, as a financial institution, you will earn a little less temporarily, but more in the future. Tell them: we will finance the transition with existing and new products, but we have to create room for that now by de-greying."
Aren't they then in danger of shareholders and customers switching to the (less idealistic) competitor?
"Yes, they might. And that's incredibly difficult, I'm not going to pretend it's not. But ultimately I think financial institutions are there for the long term. So it's hugely important that they green their portfolio. Tell a story with that, dare to be a leader. Financial institutions are servants of the real economy because they support investment decisions made by businesses and citizens. That does not mean they have to wait passively for those to knock on their door. Financiers can also encourage, motivate and entice, through interest rate discounts, longer maturities, and pleasing tax terms."
Banks often argue that they are a reflection of society. That they finance what society asks them to finance. That would include oil and gas fields today. What do you think of that attitude?
"That's true when you think of a servant of the real economy as merely following the investment decisions made by the real economy. If the government doesn't build in enough greening incentives, coal plants will just stay open. And yes, then we should finance them. That is indeed a line of reasoning, but not one that I strongly support. I think it's unwise. Because if you look beyond that, you know that those coal plants are not future-proof. Stop that today and do the world a favor. Use your capital power to invest in sustainable forms of energy. That is also in the interest of the financial institutions themselves."
So what exactly is that self-interest?
"If financial institutions keep a short-term view, then greening will not go fast enough. Fortunately, Dutch pension funds recently announced that they are going to invest heavily in the energy transition. They are not doing this because there is a law that says they have to, but because it increases support for their existence. Social acceptance for their "being. They know: if we want to be a part of this society, we must also act as a responsible organization.
"But it also has to do with the risks they face. If fires or floods occur as a result of climate change, their collateral or investment becomes worth less. Then they're screwed. Fortunately, you see more and more financial institutions factoring these kinds of risks into their models. But unfortunately not enough yet."
You see a role for financial institutions as advisors, in which they can help other parties become more sustainable. But these are not real financial transactions that directly encourage sustainability, are they? Or am I wrong?
"Consultancy does lead to more euros to the climate. Imagine, you buy a house and want to make it more sustainable, but you don't make use of all kinds of schemes that would make it more financially attractive. That's a shame. A bank does know those schemes. Just as they know what is possible for farmers in terms of low-emission stables or other new technologies. Such a bank can use its knowledge to get euros rolling to that citizen or farmer, which can ultimately ensure sustainability. So if the financial sector gets involved in this way, it will really lead somewhere."
'Can there also be some ambition?'
With parties such as Milieudefensie and Urgenda becoming more actively involved in the sustainability policies of organizations and increasingly finding their way to the courtroom, Baarsma and Biermans see that fear reigns. According to them, that fear is having the wrong effect and companies are adjusting their climate ambitions downward instead of upward. This is because they are afraid of being judged for potentially unachievable goals. A wrong impulse, the authors argue, because companies really will not be publicly slammed if they set ambitious goals and in the long run it turns out that those goals were too high.
How can you be so sure? Activist organizations can be quite ruthless, can't they?
"If you set the bar very high, get serious about your work and end up narrowly missing that bar, people really aren't going to pillory you. When you set high goals, you're probably also ambitious. Then you're going to steer internally toward those goals. If you fail to meet the goals by far, yes, then you have a problem."
But isn't there a danger in that accommodating attitude? Doesn't it leave room for companies that set overly ambitious goals, which they themselves know are unrealistic, purely for show?
"Imagine someone sets a very brave goal for 2050. Then you can test that for progress in the interim, in 2030, 2040, and so on. If you are then already lagging tremendously behind in 2030, you have some explaining to do. So we need milestones to build mutual trust. But do not say in advance that goals are unachievable. After all, that stops all creativity in organizations. Then you let lawsuits and fines rule, and you don't want that."
You write that perhaps we cannot expect fossil companies to switch to green energy because if they do, they will destroy their current business model. For comparison, you cite the manufacturers of typewriters, who in the past were not the ones who came up with the rollout of computers. An interesting comparison, but the difference here seems to me that typewriters did not contribute to the degradation of our earth.
"Yes, but maybe such producers had very poor working conditions, or caused a lot of pollution locally. Maybe there were other problems that are no longer an issue in our present context. You don't know all that. The point we were trying to make is that of creative destruction. New, innovative techniques destroy the old ones. And so can we expect the old producers to participate in their own demise? It's a stimulating thought that we wanted to get people thinking with at the beginning of the book."
When I try to imagine myself at the head of a fossil-based company, my first thought is always that I would want to make the transition to renewable energy as soon as possible. After all, if I don't, I'm sure I'll soon be out of business and killing my own company.
"But you are future-proof and look around you. You know what is happening in society. Make no mistake, there are also people who just stay in their bubble and don't look around. Your reflection makes sense, of course, but too many companies don't have it. So that's why you need the financial sector so much, helping brave dodos like your fictional energy company get financing, and phasing out the gray mastodons."
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