Karl Schmedders is a finance expert who shifted his focus of research and teaching to integrate the economics of climate change. Professor of Finance at IMD, he also teaches for the Rochester-Bern Executive MBA. “When COVID-19 hit, I had a reduction in my workload that allowed me to do a self-study on Environment, Social, Governance (ESG). I read all the popular books, newspaper articles, and academic publications I could get my hands on. Then, with sweaty palms and high blood pressure, I began teaching what I had learned”, says Schmedders.
His views on ESG are refreshingly pragmatic and clear. Schmedders does not believe in prohibitions and bans, because they don’t work. “I have a lot of sympathy for people who demand rules and bans to stop climate change. But in democracies like Switzerland, such measures will not find a political majority”, he says. His approach consists in setting economic incentives by lowering or raising prices depending on whether something is desirable for the environment or not. An example is the Swiss CO2 taxation on oil and gas heating. This measure stimulates the reduction of consumption and potentially also the switch to renewable energies.
“We are not facing a blank sheet of paper, where we can start from scratch and create the perfect green economy” says Schmedders. That’s why he uses the term “the green transition”. The idea behind this concept consists in imagining that we have a starting point – our status quo – and a destination where we want to go – the green economy. The movement from this origin to our goal is a transition, therefore: The green transition. Unfortunately, this transition is anything but easy and faces a lot of opposition.
One difficulty is posed by the conflict between protecting the environment and social issues. Environmental protection usually focuses on two areas: Energy consumption and food production. Often, environmental-friendly measures therefore lead to an increase in energy and food prices. Since the poorest spend most of their income on food and energy, they are the most severely affected by these measures.
According to Schmedders, there is only one solution: “We need to make sure the poor do not lose economically in the green transition. Therefore, we need to pay them for the energy and food increases they face”. But where does that money come from? It must come from the richer part of the society. In other words: Rich voters and profitable companies need to be taxed higher, to give some of their wealth to the poor. “I am aware that this sounds very leftwing and will face a lot of opposition”, says Schmedders. Therein lies the difficulty when it comes to solving the environmental crisis. This is not the only dilemma when it comes to climate issue.
Companies and managers would have the opportunity to make a difference in terms of environmental protection. However, they are facing a dilemma. As a Professor, Schmedders often meets young managers with a very green mindset. “They are personally green, but the moment they walk into their office door, they must behave differently. And even worse: The more they get promoted, the more they experience this dilemma”, he says.
What causes this phenomenon? The answer is obvious: green measures often imply rising costs and this in turn leads to lower margins and less profit. The higher the position someone holds, the greater their commitment to the company. Any action they take reducing their company’s profit puts their job in jeopardy. Thus, it is nothing but wise of them to discard their green moral compass. “They want to do good, but they simply do not have the right incentives”, states Schmedders.
Board members and shareholders expect a high return on investment and thus put the managers under pressure. On top of that, a generational conflict reinforces this dynamic: higher management tend to be older than the managers. “Older people have a shorter planning horizon. It’s more likely for them to lack understanding regarding the severity of the environmental disaster we are facing”, says Schmedders. But the main cause of this dilemma is the lack of monetary incentives for green measures. Which brings us back to the beginning: this is precisely why Karl Schmedders advocates, when he demands more economic incentives for eco-friendly behavior.
According to Karl Schmedders, the dilemmas and challenges we face regarding the environment are difficult to overcome. Nevertheless, there are a few glimmers of hope. On the one hand, the mindset of young people will gain power in the coming years and may lead to a change. In addition, the looming energy shortage could have the effect of showing us that lower consumption is possible if we really try. “The Ukraine war is terrible in so many ways, and the direct effects of a war are always also a disaster for the environment. But maybe just maybe… at some point we look back in 2023 and say: That winter we managed to reduce so much energy. Let’s do this again – this time for the sake of the environment”, concludes Schmedders.