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“Bleaching coral reefs were never going to scare Europeans, but flooded basements will”: Wolfgang Kuhn

Jul 29, 2021

Wolfgang Kuhn is a Director of Financial Sector Strategies at ShareAction. With 20 years’ experience in fixed income markets, investing in corporate and government debt, allocating to high yield, emerging markets, convertibles and loans on behalf of institutional investors around the globe.

Wolfgang has a strong interest in risk management, he has been on a quest for the right approach to sustainability in bond management since 2006. Wolfgang is convinced that the orthodox investment framework of risk and return is dangerously incomplete, and needs to be complemented by a third one, real-world impact.

His most recent role was that of Head of Pan-European Fixed Income at Aberdeen Asset Management, managing European credit and macro teams. Previously, he worked for UBS, Deutsche Asset Management and DG Bank.

Wolfgang graduated from Technical University of Berlin, having also studied at University of Wisconsin and University of Freiburg. Wolfgang is a CFA Charterholder, a Certified EFFAS Financial Analyst (CEFA) and a Financial Risk Manager (FRM).

You won’t find an investor these days who doesn’t swear by long-term returns. But, apart from the blessed trusting souls believing in private equity’s long-term myth, you won’t find anyone who isn’t hooked on monthly or quarterly results.

Praveen Gupta: Shareholder resolutions are a critical tool for investors, do you think investors can use voting to help shape ‘real world outcomes’ on the systemic sustainability issues?

Wolfgang Kuhn: No question about it – they can and they should. Until very recently, the vast majority of mainstream investors would have considered voting as something you do because you have to. Very rarely has voting been used to shape the future of companies. Of course asset managers’ stewardship departments would protest. I am always surprised to read the term “shareholder revolts” when the remuneration package for CEOs stands. Not quite the revolt. The only thing it needs is a majority of shareholders to say “no”. Why don’t we see that more often?  

PG: The world keeps emitting over 40 Gt of CO2 per year. We are getting precariously close to exhausting the carbon budget and running out of time for limiting warming to 1.5C. Is banning fossil fuel the only choice we may be left with?

WK: It might well be. But, of course, that is not politically feasible yet. A minimum carbon price seems to gather politicians interest. But vested interests will ensure that it won’t happen. Unless, of course, society takes control. Banning fossil fuels would make sense. At the moment, you won’t see the term “fossil fuel phase-out” in any of the net-zero initiatives of the day. Net zero yes. Carbon phase-out no. Humans are susceptible to logical inconsistencies.

PG: Carbon offsets do not reduce carbon emissions; they only delay them?

WK: Of course I understand the idea behind offsets. Offsets can motivate climate investment in emerging markets where it is seriously needed. But as things stand now, we don’t have time to use inaction in developed markets to fund necessary infrastructure.  So: no offsets. Delay and invest is not a thing any more. REDUCE and invest.

PG: Can technological innovations solve our ecological crisis? Global climate action relies too heavily on energy savings that may not materialise?

WK: Energy savings over time tend to go hand-in-hand with higher energy demand. Hoping that technology will save us from changing the way humanity treats nature is very convenient; unfortunately, it seems too good to be true. If we’d pray more, we might find technological solutions to absorb atmospheric carbon at a scale that can save us. But people don’t pray a lot these days. Mending your ways is never convenient.

PG: Can investor activism deliver the desired outcome in isolation of political will to take unpopular measures and individual behavioural change?

WK: No. Of course not. Investor activism is just a piece in the puzzle. Without the political will to take unpopular measures and individual – as well as institutional! – behavioral change, our children (we ourselves will be ok, just) are doomed. But investor activism can help to get the necessary change of mind going. Companies don’t just emit carbon; they also often lobby against necessary changes considered by government. This needs to be stopped by investors. But that is not all.

Investors need to end themselves the focus on short-term gains. You won’t find an investor these days who doesn’t swear by long-term returns. But, apart from the blessed trusting souls believing in private equity’s long-term myth, you won’t find anyone who isn’t hooked on monthly or quarterly results. We buy 100-year bonds now, because the spread duration could really make money if spreads tighten next week.   

The floods are definitely focussing minds. It is almost embarrassing how politicians are now falling over themselves to demand the most ambitious climate action when, until two weeks ago, they dismissed such demands as unrealistic scaremongering.

PG: Much of what you do is limited to Europe, yes, the US is waking up but what about Asia and Africa? Their biodiversities will come under growing pressure?

WK: The climate crisis and biodiversity destruction are global problems. Europe can (afford to) try to lead for a while. But we are all in the same boat. Everyone can make the boat capsize. This, however, cannot be an excuse for European investors and companies not to act. But arguments pointing to global justice don’t usually work. We can only hope for a sense of shame: that no-one will want to end up as the obvious one “ruining the whole thing”.

PG: Is ESG at a dead-end? Time to reinvent and if so, how?

WK: ESG is not a dead end. ESG is profitable. ESG is rational. Not bothering about ESG is like saying you don’t like vowels in the alphabet. But ESG won’t help humanity get out of the hole that it has – with very uneven contribution – dug for itself. Unless we break the mantra that saving the planet is a win-win. Well, it kinda is: if we stop destroying the planet, we all win. But at the moment, the financial industry makes it look like a walk in the park: “you can save the world while making handsome returns!”. Possible, but not very likely.

In order to NOT destroy the planet, some opportunities might need to be left on the table. Of course, we need to stop focusing on public assets. As long as private assets are considered “smart”, because they offer a neat way to get around the saving-the-planet-nonsense and continue to make handsome returns, we will not get very far. Asset owners need to dare face up to general partners. Owners of all asset classes need to start behaving like owners and accept the responsibility that comes with ownership. That is what we tell children when they get their first pet.

PG: Isn’t there too much bureaucracy riding the Climate Change bandwagon?

WK: I am not sure bureaucracy is what I fear. Rather, it is the net-zero activism that we now find all around. Everyone is joining some initiative. And that would be fine, only that the initiatives never have any real action against them. Action is always going to come later, after methodologies have been discussed, strategies set, targets determined, KPIs agreed, a lot more data gathered. Give it another one, two, three years’ time. Because it takes that long to convince laggards, and we don’t want to leave these laggards behind, do we? This is how you approach issue of moderate interest, not the most important challenge humanity has ever collectively faced.

We were told at the beginning of the decade that we had 10 years to cut emissions in half. But no one wants to address the difficult decisions where short-term money might have to be left on the table. Stakeholder capitalism is very cute until careers, bonuses, returns are at stake. At which point joining a net-zero initiative is buying time: no-one can be expected to change the world overnight, right?

PG: The recent floods – how does that mobilise public opinion and nudge the politics towards a greener Europe?

WK: The floods are definitely focussing minds. It is almost embarrassing how politicians are now falling over themselves to demand the most ambitious climate action when, until two weeks ago, they dismissed such demands as unrealistic scaremongering. Bleaching coral reefs were never going to scare Europeans, but flooded basements will.

PG: May you succeed in bringing about all the transformative changes that you are striving for, Wolfgang!

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