Shifting the Trillions

On February 25, 2021, the Sustainable Finance Advisory Board of the German Federal Government presented its final report entitled "Shifting the Trillions – A Sustainable Financial System for the Great Transformation" after two years of work. Among other things, it examined the extent to which companies and financial market players in Germany and Europe take aspects of sustainability into account in their investment decisions. Furthermore, a package of measures and a corresponding need for action and implementation were formulated.

After reviewing the report, Prof. Dr. Tobias Popovic, a professor in the Business Administration program at Stuttgart University of Applied Sciences, who has also been researching Sustainable Finance for over ten years, welcomes its key points and characterizes it as groundbreaking and worthy of support. With his main research topic of Sustainable Finance, Popovic has developed in recent years from an exotic figure in finance research to a proven expert on this topic. What is the key role of the transformation toward a more sustainable economic system? From the very beginning, Popovic's research activities focused on the question of how the capital market could be used as a "catalyst" to combat major societal challenges, so-called "grand challenges," such as climate change or the achievement of the UN Sustainable Development Goals. In this context, the Action Plan for Financing Sustainable Growth initiated by the EU Commission in 2018 focuses on three overarching objectives: redirecting capital flows toward sustainable investments, integrating sustainability into risk management, and promoting transparency and long-termism.

But how will changed regulatory conditions, such as those called for by the German government's Sustainable Finance Advisory Council, affect companies' strategies and business models? Will the necessary measures outlined therein turn the economy upside down? And what are the consequences for consumers? These are questions that Popovic, who teaches Corporate and Sustainable Finance, Financial Markets and Services, and Corporate Social Responsibility, has been investigating for a long time. "It has been recognized," Popovic says, "that the capital market can be used as a lever to combat climate change and comprehensively transform our economic system toward a social-ecological market economy. In the future, banks, insurers and investment funds will also have to measure their financial decisions by the extent to which they do or do not have an impact on CO2 emissions. The 'magic square' of return, risk, liquidity and sustainability will become mandatory in financial management in the future."

This has implications for each and every one of us. For example, anyone who wants to buy a CO2-intensive property, Popovic added, will have to reckon with higher financing costs in the future than for a comparable property with a lower carbon footprint. It can also be assumed that market prices for CO2-intensive properties will be discounted. He sees a great need for action with regard to better dovetailing the CO2 pricing, also known as the "CO2 tax," introduced at the beginning of 2021 with the starting points of the EU action plan. According to Popovic, who is also ethics officer at HFT Stuttgart, the need for harmonization of ecological and social sustainability arises in the case of pricing. Social compensation mechanisms, such as those that exist in Switzerland or British Columbia, could help to avoid social injustice.

Further answers to questions related to this topic are also being sought at the Center for Sustainable Business and Management (ZNWM) located at HFT Stuttgart, whose co-director is Tobias Popovic. In recent years, various projects funded by state and federal ministries, foundations and the EU have been carried out at the ZNWM. A particular focus has been on the financing of energy and mobility transformation, sustainability innovations, the financing of sustainable buildings and infrastructures, and sustainable insurance. A large proportion of the projects took place in transdisciplinary real laboratories, so-called living labs. Research results are also incorporated into teaching in this area. For example, topics and research results from the field of sustainable finance are an integral part of the courses not only in the business administration program, but also in the master's programs in general management and smart city solutions.