“IT LOOKS LIKE THEY CLEAN UP THEIR ACT, BUT…”
Caroline Flammer is one of the world’s leading researchers in sustainable investing. In her academic work, the Swiss economist examines how sustainable investing can help create a better world. In an interview with Forbes, she talks about false incentives, a lack of time dimensions — and a radical rethinking in the economic and financial world.
“We are right in the middle,” says Caroline Flammer bluntly. “Climate crisis, loss of biodiversity, poverty, social inequality and so on: the pressure on companies and the financial sector to do something is increasing.” Of course the Swiss, who has been Professor of International and Public Affairs and of Climate at the Columbia University operates in New York City, that’s right — because large companies in particular (but also the financial sector) must increasingly ask themselves, in addition to the question of growth and profits for media investors and new employees, the question of what impact they have on the environment and society they have.
Large corporates and financial investors have not been completely idle in recent years. Numerous Wall Street greats, including BlackRock boss Larry Fink, have made it clear publicly that the short-termism and profit orientation of the last decades must end. This had an effect: sustainable investments increased continuously; in 2022 the market had a volume of 37 trillion. US$ in assets under management – that’s not a small amount of money.
Flammer: “My research shows that initiatives in the areas of corporate social and environmentally responsible practices can increase the value of companies in the long term. But if that is the case, then the question arises as to why these topics are not an essential part of corporate strategy and governance?
”Flammer identified three challenges. First: Incentive systems for managers are almost always monetary and short-term oriented. “The bonuses usually consist of variable payments in relation to current profits and are not linked to longer-term financial or social goals. There is no time component at all. In addition, the average length of stay of CEOs in large companies is only between four and five years. As a result, it is not surprising if CEOs tend to think short-term and do not invest in long-term corporate strategies, even if they would have a long-term positive impact on society and the environment as well as on company value.” Long-term incentives could change that.
But the problem is a bigger one, as the researcher explains: “There is no time dimension in most of our management theories either. Somehow we didn’t take that into account.» Flammer suggests a rethink: «We should link the pay of managers to the long-term performance of the company — in financial, ecological and social terms.»
The second challenge: Investors have to rethink. The often practiced disinvesting, i.e. selling shares in companies that work with fossil fuels, is not necessarily the best idea, says Flammer: “Then another investor buys the shares, the situation doesn’t get any better or worse. Rather, investors must enter into an active dialogue with their portfolio companies so that they change their practices.” This approach is also called shareholder activism in modern German. “This is how you can enable change,” says Flammer. Third point: A radical rethink is needed in business, science and society — instead of only taking the well-being of individual portfolios or companies into account when making decisions, decision-makers must adopt a systems perspective. Flammer: “Our thinking and actions are always geared towards individual companies or our portfolio. What is needed is an alignment with the system.” Flammer sees politics as responsible for creating the right framework conditions through regulation. Flammer knows that this doesn’t always work.
She gives an example: “In the USA, consideration is being given to requiring companies to only publish their Scope 1 and possibly Scope 2 emissions. But that can lead in the wrong direction.” To explain: emissions from companies are currently divided into three categories. Scope 1 is the company’s direct emissions, Scope 2 is the energy required by the company; Scope 3 are emissions that consumers and suppliers produce. If only Scope 1 emissions have to be declared, this could lead to emissions-intensive areas being outsourced, causing them to disappear from Category 1.
But that doesn’t change anything for the planet. “It looks like they clean up their act,” says Flammer, who occasionally slips into English during the conversation. “But nothing changes regarding climate change. It would be ideal if companies were obliged to declare all emissions, i.e. Scope 1-3.” Rules are often circumvented — because the financial system does not generally measure the extent to which companies protect the environment and society as a whole when evaluating sustainable corporate management – ie including through their suppliers and consumers – and whether they support the state’s environmental and social policy or rather oppose it. Here, too, the focus on short-term profits of individual companies and portfolios is too great, according to Flammer, and the focus on long-term systemic risks is too low: “Companies are increasingly experiencing failures in the value chain, crop failures, etc. If we do nothing, these risks and costs will only increase The economist also blames the academy for the fact that this awareness is not yet sufficiently present:“We need to bring the systems-focused approach into the classroom and make future managers and investors aware that they should also pursue it.”
At the very bottom of her CV, Caroline Flammer added a line: “First-generation student.” Because the Swiss, who grew up in Thurgau, was the first in her family to ever go to high school. “I write this to encourage others.” In fact, Flammer originally wanted to study theater studies, but decided against it. “For a long time I didn’t know what I actually wanted to do,” she says today. Flammer worked as a hotel manager in Costa Rica after studying economics in St. Gallen and earning her teaching diploma at the University of Zurich before starting her PhD studies. A stay in New York followed before she went to the MIT Sloan School of Management as a postdoc in 2011. She then worked at the University of Western Ontario and Boston University before coming to Columbia University in 2021. She answers the question of whether she is an optimist given her work with a grin – and again partly in English: “I am an optimist. Hope this lasts.”
