Laws or self-regulationHow to design sustainable financial markets?New series: Doing the Research

24 February 2022, by Anna Priebe

Photo: Pixabay/meineresterampe

The first article of our series Doing the Research explores how best to promote sustainable investment, such as in wind energy.

To reach climate goals, people working in politics, the corporate sector, and society must work hand-in-hand. This is also true for the sustainable design of financial markets. Prof. Dr. Wolf-Georg Ringe, professor of law and finance at Universität Hamburg, is studying how to exploit markets for the sake of climate-friendly transformation. The Doing the Research series introduces individual research projects at Universität Hamburg

The European Commission wants to support people who make climate-friendly investments. The so-called taxonomy, or a definition of “sustainable” with regard to financial investments, should provide some guidance. But are investments in nuclear energy sustainable? This question has been hotly debated in the past several weeks.

“Transparency makes it possible to agree upon what can really be judged as sustainable. Creating international standardization and thus comparability is the job of the law and of politics,” says Prof. Dr. Wolf-Georg Ringe, director of the Institute of Law and Economics (IRÖ) at the Faculty of Law. As in the case of taxonomy, Ringe is trying to determine how certain legal provisions affect financial and capital markets.

Less interference, more possibilities

In his current research project, the legal scholar looks at how we can tap financial markets to reach international climate goals: should we be looking at political provisions or self-regulation? In his current working paper, Ringe preaches restraint when it comes to political intervention: “The law should play a facilitating role and reject detailed regulation of corporations.” For his research, he analyzes the legal status quo, connecting it to planned regulation and instruments; evaluates empirical findings; and exchanges ideas with practitioners. “I look at, for example, whether something that the European Commission is aiming for already worked in this or another context. Possible consequences are often already known from the past.”

Ringe believes one thing speaks above all for the self-regulation argument: the investors themselves. “The so-called Millennials show distinctly different investing behavior than previous generations and they name sustainability as a more important goal than just reaping profits,” says Ringe. Larger asset managers such as Blackrock, Vanguard, and State Street, as well as smaller asset managers would orient themselves accordingly. “Complying with environmental, social, and governance standards, the so-called ESG criteria, is becoming more and more central,” says the legal scholar. And therefore many businesses would thus take the initiative here.

Cooperation in the fight against fossil fuels at an oil company

According to Ringe, there is also the intrinsic motivation of asset managers. The larger fund managers essentially have a few shares in any listed company. “So they have significant interest in market stability. It’s really a matter of basic logic to pursue strategies that are sustainable and long-term,” explains Ringe. Furthermore, there is an ever-stronger tendency towards cooperation between institutional investors because funds rarely have more than 2 or 3 percent of their shares in companies and thus have little influence: Investor Engine No. 1, for example, successfully created an alliance of large investors that made it onto the board of the American oil company Exxon Mobil in order to shift it away from fossil fuels.” This, according to Ringe, is a built-in mechanism by which investors take care of self-regulation.

Ringe sees his research findings, which he presents, for example, at conferences, as a contribution to the academic discourse as well as to political debate: “For example, I go again and again to Brussels and speak to the Commission at hearings or as an expert at workshops with politicians.” But one thing is clear, says Ringe: “In Brussels, many different interests are negotiated and putting things into practice is highly complex. It’s a long road.”