11.02.2025On the Path to Greener Financial Markets

Prof. Zacharias Sautner from University of Zurich is a leading expert in sustainable finance. From examining the impact of corporate lobbying on climate action to developing innovative tools for measuring climate risks, his work exemplifi es the vital connection between academic research and practical application. Text: Victoria Watts, photo: Sho Naito

This is partly due to how incentive structures are set up. Companies will act within the regulatory framework and based on business logic. Even though economists agree that a carbon tax would incentivize companies to significantly reduce CO2 emissions, there is currently no such tax at a global level, or if it is there, it is set too low.

One answer is lobbying. We have just posted a paper in which we show that US companies are spending large amounts of money to prevent stricter climate regulation. Interestingly, we also document for the first time that companies that spend a lot on such anti-climate lobbying constitute an investment risk for investors. The reason is that anti-climate lobbying implies large reputation and transition risks. I hope our findings lead to more investors challenging their portfolio companies on these lobbying activities. Eventually, this is in the long-term interest of investors, their companies and the planet.

One mechanism is the cost of capital channel. Companies need financial capital to run their operations and grow. Research shows that the cost of capital, that is the cost of equity and debt, is higher for businesses with a negative impact on climate change and biodiversity. It is therefore rational for companies to reduce emissions and their impact on biodiversity because it reduces the cost of capital. This creates shareholder value.

Some investors have an intrinsic incentive to care about climate change, especially those that are exposed to the entire market, such as big pension funds. Why? Because these investors will be paying the bills of climate change down the road. For example, many pension funds own real estate in coastal areas or areas affected by landslides. They have therefore a strong interest in fighting climate change. One way to do this is to use the power of capital, for example by engaging portfolio companies to become more climate-friendly.

ESG ratings are important because they try to quantify companies’ ESG risks. Investors can use these assessments to measure, manage and price these risks. Important to note is that ESG ratings typically do not reflect to what extent companies are improving the world. It is crucial to understand this difference because it implies that simply buying mutual funds or stocks with high ESG ratings does not necessarily make the world a better place.

Some people believe that ESG-based investing is a part of “woke capitalism”, which arguably pushes companies to do leftish things that are not really in their interest. But that is not what ESG investing is about. ESG investing is not an ideological flavor but an important tool that helps investors manage ESG-related risks. And there are plenty of them.

There is enormous competition in terms of making capital markets future-proof by offering investors financial instruments that entail solutions to the climate or biodiversity crisis. Think of green bonds, carbon certificates, or biodiversity finance. Several financial centers across the globe have started to adapt their market infrastructures and developed these instruments. Several Asian capital markets in particular have moved forward at fast speed, putting plenty of money into these developments. Interestingly, this includes significant funds to promote research that helps us better understand how to green the financial system.

Switzerland has recognized the importance of integrating sustainability issues into financial markets to remain competitive. My professorship in sustainable finance is part of these efforts. One goal of my research is to provide fundamental insights that benefit the Swiss financial marketplace. In this way, I hope to contribute a bit to Switzerland remaining a global leader in finance.

Yes, local research really matters. Think of the pharmaceutical sector. To retain leading pharmaceutical companies in Switzerland, you need to provide fundamental research in medicine or pharmacology in Switzerland. And you need to off er cutting edge education and training to the Swiss labor force. The same logic applies to the financial sector. The Swiss Federal Council’s Sustainable Finance Strategy clearly states that Switzerland wants to be a leader in sustainable finance. So, we need world class research on sustainable finance in Switzerland. Me and my colleagues at UZH try to do exactly this, thereby providing the latest insights to policy makers and the industry.

One dimension is to make our research and the data we generate available as a public good. To illustrate, we have developed a novel approach to measure companies’ climate risks and opportunities by analyzing the transcripts of 10'000+ earnings conference calls by companies. In these calls, managers and their investors discuss current and future developments that companies face. We measure how often climate-related topics were discussed in these calls, and whether the discussion focused on risks or opportunities. We have made our data publicly available and dozens of research teams have already started to utilize them for their own work, for example to understand how climate risks are priced in financial markets. Such data provides complementary information to commercial ESG ratings.

• Transparent climate lobbying: Companies should openly disclose their policy engagement, lobbying expenditures and alignment with climate action goals as these impact investment risks for investors.
• Challenge portfolio companies: Investors should scrutinize their portfolio companies’ lobbying activities and ESG impact to protect long-term value for stakeholders and the environment.
• Local research in sustainable finance: Switzerland aims to lead in sustainable finance, as outlined in the Federal Council’s strategy. To achieve this goal, we need to provide cutting-edge research and education in sustainable finance for the Swiss financial market.

...can be found here.

Zacharias Sautner is a professor of sustainable finance at the Department of Finance UZH and a senior chair at the Swiss Finance Institute (SFI). Through his research on ESG topics such as climate change or biodiversity, he provides insights on how finance can contribute to a more sustainable future.

He teaches the following courses at Executive Education: eCorporate Finance Basic, Sustainable Investing and Current Trends in Sustainable Investing. The courses are part of the CAS in Corporate Finance, CAS in Sustainable Finance, DAS Banking, DAS Finance, DAS Sustainable Finance, MAS Finance and MAS Sustainable Finance.

Source: Oec. Magazine issue #22