On the importance of being a role model
Prof. Dr. Müller-Merbach, you had a career in bank risk management, worked for a very well-known bank and joined Frankfurt UAS in April 2020. Is sustainability a prominent issue for banks?
Lately, yes. Global climate change and its consequences are perceived as a risk in the financial sector as well. For example, if a loan is secured by a forest tract and the forest is degraded or destroyed, then the collateral will lose value as well. Regulators became aware of this and instructed banks to adequately assess the sustainability risks associated with a given investment. And a penalty capital surcharge is slapped on banks carrying an excessive level of risk on their books. It all sounds very functionalist, but the goal without question is greater sustainability in their books.
As a banker, were you surprised when regulators brought to banks’ attention a lack of sustainability as being a collateral/security risk?
At first, yes, absolutely. Yet for the banking industry this was an unexpected albeit salutary wake-up call to integrate sustainability criteria into technical/substantive risk assessment processes. This is has also become an issue for qualification requirements in the recruitment of junior staff.
By when will we have a sustainability risk assessment standard?
For the most part, we – policymakers, regulators and banks – have not succeeded in establishing such standards quickly enough for completion within the timeframe. Although regulators are actually now, in fact, already expecting a well-qualified commitment to the issue of sustainability, a standard with a flexible methodology should be finalized by 2023. To be sure, the ESG Disclosure Regulation as framework recently came into force in March 2021, and the European Banking Authority (EBA) just issued a draft definition for a green asset ratio – so tangible progress is increasingly in the making.
How will such a standard for assessing sustainability risks change the world?
If banks are required to disclose their green asset ratios, then you have a common basis for discussion and comparison purposes. And, after all, people want figures as a basis for factual discussion. So if banks have at their disposal a large data pool on sustainability risks, we can also better justify certain policy measures for enhancing sustainability. A number of banks are already pulling out of financing coal-fired power plants at least.
Is the University working on tools for banks to use in devising and applying sustainability criteria?
There already are a few topics I would like to assign as Bachelor’s or Master’s theses in Sustainable Finance. For instance, we could study the issue of whether investors are in fact opting for green financial products – or whether it’s all just hype. There are of course many funds out there that label themselves sustainable. But are they truly? There are major agencies that perform sustainability ratings. But what exactly are they measuring, and how do they go about it? Given that sustainability measurement is data-intensive, the topic converges on digitization issues.
Has the University set itself the specific task of adopting sustainability as a theme?
Yes, by virtue alone of the University’s identity as a role model. Universities have always been beacons of social transformation. We have young people studying here who, on the one hand, benefit from character-building experience while deepening their knowledge and understanding; and, on the other, are still in the Sturm und Drang mindset and want to make a difference. That is yet another reason why we developed our Sustainability Strategy, on which 20 to 30 members of the University worked with disciplined focus.
I was previously employed at a bank. There we also had projects on which up 60 people worked, but I would never have even dreamed of bringing them all together in a video meeting. That would have flopped miserably. That’s where a university’s culture of discursive discipline is very fruitful.
In what ways does university culture differ from bank culture?
Complex problems are solved at both of these institutions. Intrinsic motivation is more pronounced at a university. Whoever wants to make a difference will join in. Companies tend to focus on problem-solving, yes, but it’s also about the whole attention economy as a springboard for careers. Companies’ approach to work is highly content- and results-based but staff must also come up with their own ideas and, above all, market themselves as ideators. What also counts alongside professional interest is: What do I get out of it? How does this help to advance my career?
How capable are banks of effecting paradigm changes?
Banks are quite conservative in their outlook and practices. But many of them have been integrating sustainability into their reporting processes for some time now. Still, companies engage in climate protection not for its own sake but because, by their own admission, their clients expect it of them. And it is important to also understand that bank boards have a clear mandate, to wit: managing companies successfully – and it says nothing about reducing carbon emissions. Other success-relevant goals may be introduced but will not be achievable simply by replacing a few people at the top. But if policymakers, the European Union and regulators set a goal, that will get the ball rolling.
Is the EU setting goals and triggering policy improvements?
Yes, the EU is using its Green Deal under Commission President von der Leyen to ratchet up the pressure. The EU is setting the wheels in motion – and on a significant order of magnitude. The EU is consequently giving numerous impulses for assigning Bachelor’s thesis topics though very little can be found on the subject in the media. Also the ECB’s push for green quantitative easing (green bond purchase program) under Christine Lagarde harbors big changes. The EU is getting more done than German policymakers are.
How might German policymakers strengthen sustainability with economic regulations?
The German Stability Act, in force since 1967, was designed to promote price stability, employment and external trade balance, as well as steady, adequate economic growth, but numerous attempts to integrate sustainability have failed. And now we’re even witnessing German opposition to the ECB’s green monetary policy. I find that truly exasperating: the minute you get down to real specifics, it gets rejected. No advantage is being taken of the announcement effect for greater sustainability.
Is the University accepting of you as an economist gunning for sustainable finance?
Environment, economy and social sustainability are not naturally opposed to each other but do call for active regulation to achieve mutual compatibility.
What specifically can Frankfurt UAS do to make itself and its environment more sustainable?
The task force has already developed many targeted measures. As a University, we highlight in our mission statement our close connection with Frankfurt and the Rhine-Main region. Once the Corona crisis is behind us, we might consider adopting a sharing economy concept and, instead of leaving our heated rooms empty during the evenings, for instance, make them available to other users in the region, assembly rooms being a scarce and expensive commodity in Frankfurt.
What long-term impact do you aim to achieve in implementing sustainability as Frankfurt UAS?
Thinking ahead, we don’t just want our students to switch to bicycles for transportation; we want them to become interested in, and open to, sustainability issues on a lasting basis. In my advanced lecture, I bring home to them how important sustainability will become in business reporting due to regulatory requirements alone, and this additionally translates to great job opportunities. That applies analogously to engineering, you can be sure. The topics are different, but the underlying idea is the same.