COP28 closed last week with an agreement that signals the “beginning of the end” of the fossil fuel era

Following the close of COP28 last week, Markus Müller, Chief Investment Officer of ESG & Global Head of Chief Investment Office at Deutsche Bank’s Private Bank, speaks to LUX about his key takeaways from the conference

LUX: Did COP28 move the dial on climate change?
Markus Müller: Yes, from my point of view it did. Look at the commitments to triple global renewable energy capacity by 2030 and double energy efficiency. But it is what is implied by such commitments that is most interesting. This isn’t just a matter of developing pure supply. We’re also going to have to develop markets – by changing permissions and enhancing grid connection, to mention just two factors out of many.

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We also have to recognise who can do what by when. Rapid adoption of renewables may pose the biggest challenge for the Global South. After nearly 30 years of these climate change conferences, it’s also highly important that fossil fuels have finally formally been mentioned in the commitment for a “transition from fossil fuels to cleaner energy”. In statements for previous COPs, there has just been talk about reduction of harmful subsidies. This is a clear step further. The problem for countries is now to make this happen without sacrificing living standards.

Global solidarity was shown at COP28 when negotiators from nearly 200 Parties came together and signed on the world’s first ‘global stocktake’ to ratchet up climate action before the end of the decade

LUX: What was your best professional moment at COP28 and why?
MM: My best professional moment was a talanoa-style dialogue with the Island Youth from Hawaii, Philippines, Palau and Samoa. It was impressive to listen to the Island Youth discuss their views and hear their take on challenges ahead. The dialogue helped me understand how disconnected the world still is on many topics – but it also revealed a lot of hope for the future. We know what to do on climate change but we have to act now.

LUX: What was the biggest disappointment and why?
MM: The biggest disappointment was that the sheer scale of event hindered effective dialogue between businesses, policymakers and NGOs. Compared to recent COPs it was simply too big – in terms of numbers of attendees and, for example, physical distance between their stalls. We could have done a better job in bringing together the “needs” with the “what” and the “how”.

Over 85,000 participants attended COP28 including civil society, business, Indigenous Peoples, youth, philanthropy, and international organisations as well as world leaders

LUX: Do you sense genuine momentum towards changing economic thought to take account of natural capital, or is this still an outlier?
MM: I think that nature is coming more and more towards centre-stage but it still isn’t there yet. Next year’s biodiversity COP (COP16 in Australia) should however help make it clear that if we want to tackle the climate crisis we also need to solve the biodiversity and ocean crisis. We need nature for mitigation and adaptation and we need to think more in terms of natural capital to work out how best to do this.

LUX: “Overall, COP28 did more harm than good. The environmentally damaging deals that emerged from informal meetings will do more harm than any resolutions will do good”. True or false, and why?
MM: False. What about all the positives what we all bring home from our informal conversations too? Also remember how news reporting from this and previous COPs have raised awareness of environmental issues in public discussion worldwide? COPs have normalised open discussion of topics previously seen (wrongly) as not relevant to the global citizen. We probably don’t give enough prominence to the publication of the “Global Stocktake” either. This text lays not only the pathway that nations must take to limit global warming to the previously-agreed-upon goal of no more than 2°C higher than pre-industrial levels—but also individual countries’ progress along this path.

COP28 saw Parties agree to Azerbaijan as host of COP29

LUX: Hypothetical question: you are hosting one of the next COPs, and you have absolute power over the final resolution. What would it state – in a way that is both effective and implementable?
MM: I’d make three commitments. First, for Nature and Ocean to join Climate at centre-stage of policymakers’ attentions. Second, to prioritise fixing problems with the allocation of climate finance. Third, and this is very much linked with the second commitment, to put an explicit focus on fairness. Most such finance to middle-income countries for projects that reduce emissions, such as wind or solar energy.

Read more: COP28 Diary by Darius Maleki

Far less goes to the poorer countries, and even smaller amounts to help countries adapt to the effects of the climate crisis. Many participants believe that the focus of future COP meetings needs to be on a fair way to reach targets. As part of this, developed economies need to band together to financially support developing economies in the search for a new, less fossil-fuel intense development path. I think we’ve seen a change in attitudes here in recent COPs and I look forward to them delivering much more here in coming years.

Markus Müller is Chief Investment Officer of ESG & Global Head of Chief Investment Office at Deutsche Bank’s Private Bank

Find out more:  deutschewealth.com/esg

Desertification is one of the key consequences of climate change

With COP 28 just days away, Commonwealth Secretary General Baroness Scotland and Deutsche Bank’s Markus Müller speak about the need to prioritise implementation of climate goals at the critical global conference. In a conversation moderated by LUX Editor-in-Chief Darius Sanai, the Secretary-General and Deutsche Bank executive underscore the need for collective action for climate reversal on the part of the international community to counter an increasingly urgent crisis

Baroness Scotland

LUX: What are your hopes and expectations for this COP?
Baroness Scotland: My hope is that this COP will be the implementation COP. If you look at the COPs which have preceded it, you will see that there has been an awakening of the understanding about how urgent the danger is.

We have been talking historically about the existential threat for many of the members of my Commonwealth family. But that threat is not a threat: it is here. It is omnipresent. The “1.5 to stay alive” slogan is not a slogan, it is a reality. At the moment, 1.5 is on life support. We must give it the oxygen it needs. It means the difference between whether some of our small island developing states will continue to exist, or whether they will disappear.

Although it is encouraging to hear Australia say that they will take the people from states which are subsumed by the sea, such as Nauru, this still means that their traditions and cultures will all be gone. Their graveyards will be at the bottom of the sea after thousands of years of existence.

My aspiration for COP 28 is that we will deliver on the promises we will make. The $100 billion a year by 2020 that we were promised in 2009 still has not been delivered. It has to be delivered.

LUX: The richest countries are good at words, not implementations. What needs to change in order for that to be delivered?
BS: One change that has already happened is that businesses and the private sector are now intimately involved in the delivery. If you look back at previous COPs, even in 2016 there was still a debate as to whether climate change was real. There was a debate as to whether we would go green and blue in terms of energy. There was a debate about loss and damage. Those questions have been answered. If you look at what happened in Glasgow, the idea that the private sector would not be intimately involved in order to deliver the solutions is now unthinkable.

Second, which I have been saying for a while, we must recognise that human genius got us into this mess, and will now have to get us out of it. If you look at the industrial revolution, it was amazing, but that brought more devastation climatically than anything else. Human genius will have to get us out again. Some of the extraordinary developments – such as geo-spatial data – will allow us to better understand what is happening, and therefore, perhaps, how we can reverse it.

Oases in North Africa are disappearing as the Sahara spreads northwards due to climate change

A third change is that we have accepted that this isn’t just about adaptation and mitigation. When I first said in 2016 that we needed a regenerative approach to development which would reverse climate change, people thought that I was crazy. Now, everybody accepts that we need a regenerative approach – one which adapts, rather than just mitigates.

Markus Müller

LUX: Markus, as an economist and also someone who has said things that some people might have considered crazy at the time, but end up being true, what is your perspective on this COP?
Markus Müller: I think that this COP will be crucial. I completely support what Baroness Scotland has said. If we do not recognise what it takes now, it will be very difficult further down the line.

First, the Global Stocktake, which will take place for the first time at this COP, will reveal some uncomfortable truths. We will hear, for the first time, how far we are behind our plans. I hope and I think that this will be an awakening moment.

Secondly, we need to get a better understanding of global finance. Perhaps I am biased, but if we do not give the global financial market a role to play in this transition, then it won’t happen. The states alone will not be able to do this; we need the capacity of global finance – be it through risk pooling, or through its distribution channels of money, location and distribution – so that we can work on these devastating aspects.

From the perspective of an individual country, their financial needs are huge. From a global financial market point of view, this is more manageable. We have been speaking about this for years, but no solutions have been delivered so far. We must listen to financial institutions. We have the tools. Together, we are powerful, but in terms of negotiation, business, and finance, the right angle is missing. In this COP, finance is crucial, and then – of course – the transition discussion.

LUX: Have the opportunities for financial institutions to work with Commonwealth nations and governments changed in the last couple of years?
MM: We have always had excellent relationships with the countries of the Global South and Africa. However, as we see real world climate changes, financial needs are changing too.

It’s no longer about financing the past, the traditional infrastructure and traditional energy supply. We now need to finance the future – and this is something which is still missing. The vision of how the future could look is not there. We should ask ourselves, “What should we have done in order to be healthy in 2050?” as if we are in 2050 already, so that we know which direction we should take.

This discussion should take place in financial institutions. President Macron said this very clearly. We have the International Monetary Fund (IMF). We have the World Bank. We have these huge international institutions. But we need to be ready for the 21st century.

BS: We must also help them better understand debt, and to view the whole thing as an ecosystem. Up until recently we have looked at each element as a hermetically sealed, self-contained issue. But they are absolutely not.

With global warming making desert margins unlivable, population flight is devastating communities and leading to refugee crises

When I started at the Commonwealth, we said that we needed a regenerative approach to climate change. That meant that we needed to do more on the ocean, so we began the Commonwealth Blue Charter. One of the things I really want is to increase the amount of money going to oceans, because it is absolutely unacceptable that about 0.01% goes to oceans. We are a blue planet, we’re not a land-based planet and to actually be putting almost nothing into what makes up the majority of the world is just crazy.

It is crazy that we are not using our intelligence better. Our Climate Finance Access Hub in Mauritius has mobilised $7.8 million dollars: we are talking about peanuts. We have deployed 19 climate finance advisors across Africa, the Pacific and Caribbean regions. We are working together with those advisors, and they have already delivered $316 million into the hands of the small states with more than $500 million in the pipeline. But I do not have the money to put a climate finance advisor in every country. I wish I did.

We have seen that these applications for international climate funds are taking too long to make. For some of our LEDCs (least economically developed countries), it will be two to four years before they get the application through. However, our most recent application for five countries, took less than a year, and we got $63 million. Why? Because in the last 7 years, we have honed the process. So when we look at loss and damage, we cannot put in the old-fashioned, useless system. We have to put in a speedy, effective system which will get people the money to make a difference. Bit by bit we are changing it.

But we need debt swaps. We need a good carbon market. We think we are within touching distance of doing that, because using satellites and geo-spatial data, we are within touching distance of understanding how much every tree on the planet can sequester. We will then have the granularity to have a real carbon market, based on real, concrete estimates.

That could be a gamechanger between the North and the Global South. The Global South still has the majority of the lungs of the world, which they are being asked to maintain – but nobody is paying them. If we can get a real carbon market, that means it will be possible for us to do the reversal in the Global South to keep us alive.

Water towers in Morocco bring together local people for their construction and maintenance and create a common community dedicated to their sustainable use. When the water dries up, due to desertification, community bonds are broken – a pattern repeated in climate-related environmental developments around the world

MM: I can agree. We have been starting to understand the nature topic better. Nature is a very valuable collateral, because it creates ecosystem services on which we all depend.

BS: It is remarkable how much has changed between when we started the Blue Charter Action Group and now. We worked with them on corals and, now, understanding the role that they play in restoration has improved globally. I have just returned from the Maldives, where I was looking at mangroves, which are huge in terms of sequestration,  for and protecting coastlines. That conversation was not even happening six years ago, but now it is critical. The Maldives want to restore their mangroves. But the degradation is already there and, unless we do this quickly, it is not going to change.

MM: We must convince those who retain traditional thinking about these areas. This is a big hurdle, but if we activate the right players to do this, the solutions are there. Two years ago, we joined the Ocean Risk and Resilience Action Alliance (ORRAA), and moved with speed. Perhaps we did not do enough with regards to concrete finance, but we wanted to understand the matter first, before unleashing the power of our balance sheet.

BS: The way in which I have been approaching this from the moment I came into the Commonwealth was to ask this: “Where do we want to be in 2030? What are the outcomes?” We’ve been saying, if that’s where we want to be in 2030, what do we have to do three months, six months, nine months, a year, two years, three years? Although other people thought it was crazy, we were right.

Those of us in positions of power now need to understand that we will all be on the same indictment. History will look back and say, “tell me their names. What were they doing? What were they thinking? Why did they not move at a time when it was possible?”

But the reason why I’m confident and determined is because humanity is always at its best and its most ingenious when our backs are against the wall. And right now, globally, our backs are against the wall.

MM: This is the interesting thing about development. You need to have a decent degree of scarcity for development to really kick off. It’s sad in one way, but it’s also a very convincing catalyst for change.

The aftermath of a August 2020, wildfire which burned houses, date palms, orchards, vegetable gardens and more than 400 heads of cattle in the oasis of Tighmert in Morocco.
The increase in temperature and water stress has a considerable impact on the vegetation of the oasis, which, dried out, becomes more likely to catch fire

I also think that this discussion that we are having is proof that we are anticipating what’s going to happen. All backlash against ESG or sustainability are, for me, a signal that ESG and sustainability are being seen as a priority – otherwise we would not be discussing them as intensively as we are now.

LUX: Are developments around the world down-grading consciousness of what needs to be done around sustainability and COP?
BS: I think we woke up and smelled the coffee during the COVID pandemic. There is almost no one I know who was not affected either directly or indirectly by COVID. Most of us know someone who died, someone who was badly affected and/or we ourselves suffered from the deprivation, the mental stress, etc. I think it made a lot of people wake up and think, “What is life all about? What do I value? Am I sure I’m going to have it tomorrow?”

The other thing it did was emphasise the fact that unless we make sure others are safe, we won’t be safe and the people we love won’t be safe. The madness that we’re going through globally at the moment, the fact that every region of our world seems to be under threat, is making this fact even more omnipresent. It’s a tangled web of interlocking crises, and that’s what makes this time so volatile, so dangerous. If we don’t have a world, all the other things are not going to matter because we’re not going to be here.

I think for those in the Global South, this has remained the number one priority. What’s interesting is the agenda is being raised in the Global North, because the number of climatic disasters in the Global North is finally rising. Before, people would say the crisis had nothing to do with them. But when your coastline has been battered, when countries that have never seen a hurricane are suffering them, when trees are falling and floods are happening, when ordinary people’s lives in western cities are being made conscious of climate change, now it’s something people want to talk about.

MM: We know that cooperation is a very shy and very sensitive creature. Not being collaborative is not the superior strategy, it is the naive strategy. The smartest strategy is collaboration, but collaboration only works if there is a mutual dependency on it. This is exactly what Baroness Scotland just described; we now have a mutual dependency which is becoming evident and measurable.

A global temperature rise of several degrees, which the world is on track to suffer over the coming decades, would make this land uninhabitable

How can we solve the biggest problem humanity is facing? I believe in nature. Nature is stronger than humans, and it is currently taking back what humanity has taken. We need to be humble, but also use this as a tool for prosperity, because we need prosperity in order to survive and to create social stability. This also goes back to the aforementioned human genius, and to nature’s genius. Let’s activate this and let’s get there.

BS: And just think about the technological changes we’ve gone through in the last year. AI and digital and machine learning is enabling us to do analytical work exponentially faster. Before, you would have to do computations, which would have taken you 5-6 years. We’re now able to do the same computations within the space of weeks.

In the Commonwealth we’ve created and launched an AI consortium to look at the needs of small and developing states in particular. There are 42 small states in the world and we have 33 of them; if we can address the needs of those small states, this becomes a microcosm that we can use to solve many other problems. This interconnection and understanding that what works for one of us could work for all of us, is particularly powerful and why I am so delighted that the Commonwealth of 56 is being used as a kind of petri dish. We’ve got all regions: rich ones, poor ones, landlocked, island states, developed, all faiths. Therefore, if we can work something out that can work for our 56 countries, it is likely that it could become a pathway for the rest of the world.

LUX: What would be a satisfactory, realistic COP?
MM: I think what would make me satisfied is, first of all, to come to a joint conclusion on how to phase out fossil fuels in a way that this transition provides further prosperity for our countries and societies.

Secondly, I would say that this COP would be a successful COP if we were to get an agreement on how to finance the inclusion of the Global South in the economic and sustainability transition processes. The Loss and Damage Fund was meant to be this tool, but there is no money behind it. We need to get this signed by all nations.

Finally, I would love to see that nature as a whole, be it the ocean or biodiversity, gets closer to the climate discussion this COP. We must use tools like carbon credits and biodiversity credits to transfer the money from the users to the object or subject to be financed. For example, rainforests are our common goods to sequester carbon, to really get the finance mechanism working.

Climate change means that in some areas, water resources have vanished, while other lands are disappearing under increasingly acidifying oceans due to rising sea levels and higher CO2 levels

BS: I agree, and that really means we will have created a regenerative model of sustainable change to deliver climate reversal at this COP. That’s what we need. We also need – and I think we will hopefully get it – an understanding that this is a multifaceted, multidimensional approach needed by everybody. It will be business, it will be foundations, it will be individuals, it will be governments, it will be led by all of us.

Markus is right. We’ve got to get the money right, and there is no point in making promises that are then not kept. We’ve got to focus on action and what that action is going to be and by whom. I think the most important thing is to be honest with ourselves and with each other as to what this quantum leap, this paradigm shift, is going to mean for each of us. And then we have to do it.

MM: I see this COP as a gym, as a fitness centre, where we all struggle and get ready for the next step. I don’t know how much weight I can lift, but at least I’m training, right?

BS: And instead of doing the hundred metre dash on our own, we’re on a relay and everybody knows which run they have to make, where the baton is and who to give it to. There’s an understanding now that unless we run as a team and we connect, we’re all going to lose. If anybody drops the baton, it’s over.

All photography in this article from the series ‘Before it’s gone’ by M’hammed Kilito, winner of the 2023 Photography Prize for Sustainability, as featured in LUX

The 28th Conference of the Parties of the UNFCCC (COP) is set to take place between the 30th November and 12th December 2023

Baroness Scotland is the 6th Commonwealth Secretary-General

Markus Müller is Chief Investment Officer of ESG & Global Head of Chief Investment Office at Deutsche Bank’s Private Bank

Find out more: unfccc.int/cop28

Small Pacific island nations like Tuvalu are at most risk of rising sea levels due to climate change; COP27 last year created a Loss and Damage Fund to alleviate their plight, but no funding has yet been forthcoming

There is a major issue with meeting our sustainability goals: the financial and structural support is, in many cases, just not there. Deutsche Bank’s Markus Müller explains to Darius Sanai what needs to happen to close the gap

LUX: What is the sustainable financing gap and what is the biggest problem we face for bridging it?
Markus Müller: It is usually defined as the difference between the cost of meeting United Nations Sustainable Development goals (SDGs) and the amount of investment actually being delivered. Big numbers are common here but we need to put them in perspective – the latest OECD estimated the annual financing gap is 3.9 trillion USD, but this is much smaller than global GDP of around 100 trillion USD. The biggest problem isn’t the size of the gap, but making sure that investment projects and systems are viable. Bringing down borrowing costs and making sure there’s a level playing field for investments are big parts of this.

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LUX: Financing sustainable development should be a priority. But is short-term thinking still making it difficult?
MM: I wouldn’t blame the sustainable finance gap simply on short-term thinking. I think most people are rightly uncomfortable with how close we are to the planetary boundaries, and this is spurring action: we aren’t just leaving this to future generations. Fixing the finance gap now needs innovation, an ability to break free of current ways of thinking and a clear view of where we want to be. Returns and cost of capital remain key issues.

Houston, Texas is attracting new technological investment due to incentives created by the US Inflation Reduction Act, which is in effect a green subsidy

LUX: You have observed that our international social infrastructure for dealing with global collaborative action (the UN, and the economic institutions arising from Bretton Woods) are from another era. Do they need to be updated?
MM: Existing international institutions provide good framework to support transformation. They can cooperate in new ways with other bodies if necessary – note President Macron’s Global Financial Pact summit earlier this year. This is a matter of evolution, not replacement. Look at the discussions, for example, around how to repurpose IMF Special Drawing Rights (SDR, invented back in 1969) to support biodiversity and other initiatives.

LUX: The climate crisis – or triple planetary crisis – requires global nations’ collaboration on a probably unprecedented scale. But is such collaboration now more difficult in our increasingly multipolar world?
MM: Collaboration is fragile by nature, but it is still possible in a multipolar world. We start from a base point where the world’s resources – financial, material, natural – are unevenly distributed. Developing economies have more physical resources (for example, metal and minerals deposits) so it may make sense for them to collaborate. But if developed economies want to participate in these discussions, they must deliver more real support. This is often lacking: for example, there have been no inflows into the Loss and Damage Fund agreed on at last year’s COP.

At COP27 in Egypt in 2022, world leaders agreed to take tangible steps towards alleviating the climate crisis, but it remains to be seen whether they will be executed

LUX: Are you optimistic that the US, EU, Russia and China (for example) will agree on and enact workable policy solutions to counter the climate crisis? What would be significant markers of progress?
MM: Yes, I am. We have seen one important, recent example of this: major technology disputes between the U.S. and China did not stop the two sides meeting for climate talks. This shows that environmental issues do not have to become a destructive bargaining chip in broader trade or investment disputes, although we should not ignore the fact that environmental operating standards do have an impact on competitiveness and thus trade tensions. For me, the key marker of progress is continued discussion and agreement to stay within overall multilateral environmental policy targets.

LUX: If we are indeed entering a more unstable era (in terms of global climate and related issues like biodiversity), do the fundamentals of policy making need to change in order to accommodate constant change?
MM: I think this is a matter of learning how to overcome unforeseen challenges, rather than simply accepting instability. As our understanding of environmental issues and how to tackle them gets better, policy will change. The fundamental shift may involve us stopping seeing policymaking as proceeding along an inflexible straight line. We need to be more flexible and accept that policy may zig-zag. Policymakers’ ability to adopt to changing knowledge to find optimum solutions should be seen as an indication of strength, not weakness.

China, one of the world’s biggest sources of greenhouse gas emissions, has recently cleaned up its urban pollution and has agreed to restart formal climate change talks with the U.S. as of November 2023

LUX: Past successes like the Montreal Protocol were one-time events. How can we ensure more sustained policy progress?
MM: I don’t think we should think of policy advances as one-time “successes”. In reality, we often don’t know the real impact of policy agreements for many years. Some agreements that are hailed as successes at the time – for example, the Aichi goals of 2011 – have subsequently proved insufficient to meet the challenge at hand. The importance of agreements is really that they drive us, one uneven step at a time, towards better environmental outcomes.

Read more: Marküs Muller on the economy and biodiversity

LUX: How important are subsidy and protection programmes for transition technologies, and can they be harmful?
MM: It’s important to distinguish between different sorts of policy support. There are good and long-standing arguments for the support of “infant industries”, in the economics jargon, but we have to be careful that this does not slide into protectionism as these industries mature. U.S. support via the Inflation Reduction Act (IRA) is giving us a good preview of transition policy support, and what really determines where new industries locate and thrive. (Consider why Houston is attracting new technologies and Miami is losing out, for example.) Ultimately, it’s all about kickstarting specific industries that will really work.

Markus Müller is Chief Investment Officer of ESG & Global Head of Chief Investment Office at Deutsche Bank’s Private Bank

Find out more:  deutschewealth.com/esg

Summer Compass Jellyfish. Photo by Theo Vickers

The protection of biodiversity is becoming a key topic in the sustainability sector. Now we need to measure our economies’ effects on biodiversity fairly and effectively, says Markus Müller in an interview with Darius Sanai

Marküs Muller

LUX: How do we measure our effect on biodiversity, or compare worms with whales?
Markus Müller: We need to find metrics that account for local specifics but are globally comparable. There is a parallel with economic activity, because humans live, produce and consume locally, yet we have found global metrics to measure the economics of human interactions.

LUX: What is the most important measuring tool in the context of nature?
MM: One important metric is the Mean Species Abundance indicator, or MSA, which identifies the impacts of an economic activity on the mean species in a designated local area. It indicates the abundance of native species in a disturbed ecosystem relative to undisturbed ecosystems. Another measure is the Biodiversity Intactness Index, or BII. Both can help us obtain information around an ecosystem’s ability to deliver the ecosystem services we depend on, and understand the influence of economic activity on nature.

LUX: But won’t the MSA in a desert have a different metric to one in a rainforest?
MM: The ingredients are different, but it is about the amount of species. We have business activity in a location and from that we get data on its pressure and impact. That shows how the MSA is clustered according to the activity in terms of climate change, land use, nitrogen deposition, hunting, road disturbance and fragmentation.

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LUX: Is the metric accepted universally?
MM: It is getting more recognition by various institutions and participants. However, our goal should not be to have a universally accepted metric for its own sake; it should be on accounting for local specificities with a methodology that, in principle, can be applied globally. It is not 100 per cent perfect, but, given the need for urgent action, as made clear by the Intergovernmental Panel on Climate Change, the IPCC, I advocate not waiting till scientists have the perfect metric.

LUX: How will the metrics affect business?
MM: When we know the effect of a business activity on the MSA, we will then know the biodiversity cost of the activity, and we can bring that into the decision-making process around it.

LUX: Is the aim to have a tax or other regulation on businesses that affect the MSA?
MM: Yes. The disclosure of a company’s MSA would allow the market to better price its exposure to nature– and climate-related risks, and take these factors into account for a valuation.

LUX: Would it work like carbon credits?
MM: Biodiversity credits are not comparable to carbon credits in a key sense because, other than for the actual removal of greenhouse gas emissions, carbon credits are used to compensate for current carbon use. Biodiversity credits must be purely an incentive not to destroy biodiversity, not to offset its loss. We can use economic incentives, such as reduced taxation, or a market system in which participants exchange credits.

LUX: How will the nature market develop?
MM: It will likely develop as we’ve seen equity or fixed-income markets develop. I would add the caveat that we should never monetise nature, but understand its value and what it gives us, so we can protect the value that ecosystem services provide, while enabling their uninterrupted flow. We need to prioritise the intactness of nature.

Photo by David Clode

LUX: How will governments regulate this?
MM: It is a question of the governance of nature. If we do not know how to govern nature, we also do not know what kind of mechanism to use to manage and assess its governance. For example, effective governance also means you need to include local communities into the responsibility of governing these resources.

LUX: Is there the desire among governments and voters to make this happen?
MM: On the one hand I think, yes; on the other, it requires uncomfortable decisions. So we need to remind ourselves again about economics and diminishing marginal utility. Humans will act in a familiar pattern for as long as the marginal utility is positive. We only change when it is no longer possible to proceed as we were.

LUX: Will listed companies make decisions based around biodiversity incentives?
MM: Yes, regulation is going in this direction. We see it with 30 by 30 – the initiative to create protected areas across 30 per cent of Earth’s land and sea by 2030. More than 100 countries are signed up. This development must not be limited to a specific region like Europe, we need a joint framework; even better, a joint narrative.

LUX: Is there a risk that companies make decisions based on one factor – biodiversity at the expense of carbon emissions, say?
MM: Yes, this is a risk of sustainability. We see it as a goal but, like economics, it is not a goal but a tool. Ideally, my role will be redundant in 20 years, as sustainability will be incorporated into everything. I think, in time, MSA or BII will be comparable indicators to CO2 emissions.

Read more: Leaders on Leaders: the people saving our planet

LUX: What would you say to an investor who says, “I just invest to make money”?
MM: I would say this way of thinking belongs in the past. We have to acknowledge that a high negative impact on nature is a financial risk as well as an environmental one. Nature-based risks – and opportunities – will materialise and have an impact on a portfolio. Companies not taking these into account, through an adaptive strategy, will have to pay a higher price in the future.

LUX: In five years, will a private-equity fund take MSA into account in decision-making?
MM: Yes, I believe so. I think it will play an increasing role in impact investing, but it will also play a role in the consumer-goods space.

LUX: If you were in charge of the world, what would you ask people to do?
MM: Go back to our roots. Think local, act global. Take account of nature, because we are a part of it. It is naive to disregard the system we are dependent on. We can’t do that any more.

Markus Müller is Environmental, Social and Governance (ESG) Chief Investment Officer at Deutsche Bank’s Private Bank

Mangroves protect coastlines from erosion and flooding, sequester carbon and provide a home to species not found elsewhere

If human beings are going to create a sustainable economic system, we must recognise the true value of living ecosystems and the services that they provide to society, and price this into our financial decisions. In the long term, the benefits will far outweigh the costs, says Markus Müller

Markus Müller

Our enthusiasm for economic development has detached us from nature. With our focus on the production of goods, we have forgotten that there literally is a natural limit to our endeavours. If we value nature purely in terms of the raw materials it provides, we fail to appreciate the many ‘ecosystem services’ that living creatures and plants provide to society, and research suggests the markets would price these at about $140 trillion.

The world is fast-approaching a point where its natural capital is so depleted that it can no longer provide us with these services. As a species, we are acting rather like a company owner who operates their machinery 24/7 without maintenance, then acts surprised that their production line is no longer able to deliver the goods. The difference with nature is that there is no option of buying a new machine.

Humans, economy and society are embedded in the environment. This applies to food, but also to areas such as medicine. We know, for example, that many of the organisms living in the sea have contributed to the development of cancer treatments and other crucial drugs. It is reasonable to suppose that similar discoveries are waiting to be made in the world’s most biodiverse habitats such as rainforests and coral reefs, and if we kill our planet’s biodiversity then we will undoubtedly kill many such opportunities.

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What does this mean for us in our daily lives, for companies, and also for the economic and financial markets? If we look at the numbers alone the issue of sustainability may appear to already be centre stage. Around the world we see growing regulation, not only in creating transparency but also guiding money flow. Now accounting for more than 36 per cent of funds under management globally, environmental, social and governance (ESG) investments have established themselves as mainstream.

However, while the ESG concept divides up current business activities into three specific categories, making the transition to truly sustainable business practices requires more than just an appreciation of financial risk and return. The ultimate objective must be to promote the health of planet Earth for the benefit of generations to come. As Gro Bruntland, the former Norwegian prime minister, said in 1987: humanity has the ability to make development sustainable to ensure that it meets the needs of the present without compromising the ability of future generations to meet their own needs.

When discussing the economic opportunities around biodiversity, I always provide a caveat. What we are dealing with is a global common good. We can’t deal with it in the same way as a private good, which is a product we can manufacture. In terms of business opportunities, we need to be careful when we speak of a global common good – like biodiversity, clean air or even the ocean – as there is a risk of doing business as usual, and exploiting these fundamentals of our wellbeing.

The good news is that with the right governance, we can move quickly from over- exploitation to repair and rejuvenation. Take mangroves, for example: they are difficult to plant, but can be reinvigorated easily. And when they are healthy they act as an effective natural carbon sink, as well as lifting the ground level by collecting and storing soil. They represent a cost-effective ‘nature-based solution’ to both climate change and rising sea levels – and, therefore, a potential business opportunity.

Simultaneously, broader economics must be considered. ESG-based investments are increasingly being incorporated into governmental social and economic policies, and should boost economic growth by encouraging more responsible management of the world’s natural resources. The concept of natural capital – valuing living things like other assets, in order to conserve them – is gaining ground with economists, and when industrial leaders begin to realise its significance then it will completely change the way they do business.

As the awareness of biodiversity loss grows, it should become an increasingly important part of corporate strategy and political policy, drawing more attention to shortcomings in existing evaluation approaches while also prompting solutions. Biodiversity loss gives rise to risks (physical, transition, and liability) for companies in myriad ways. Any decision, be it in investment or finance, therefore needs to encompass the entire product life-cycle and examine the whole supply chain.

Read More: Gaggenau: The Calming Influence of Biophilic Design

The framework we use to evaluate biodiversity preservation is likely to evolve, which will have direct implications not only for investors but also for policymakers and economists. Also, the question of property rights will need to be considered in the context of local political and cultural priorities – a tension that may be difficult to resolve. Solving the geopolitical dimension is likely to be even more difficult, as this will require the financially strong First World to demonstrate the will to obtain goods from sustainable production. All this will come at a cost, but it’s most definitely a cost worth paying to ‘protect our portfolio’. The concept of natural capital could herald the beginning of a big story – one of an innovative and equitable economic model – that is worthy of the 21st century. To reiterate my opening message: if all things were similar then there would be no development. The outcome, instead, would be destruction. Let’s embrace this challenge and adapt to a new future, embedded in nature.

Markus Müller is Global Head of the Chief Investment Office at Deutsche Bank’s International Private Bank

Find out more: deutschewealth.com/esg

This article appears in the Deutsche Bank Supplement of the Summer 2022 issue of LUX

Photograph by Isabella Sheherazade Sanai

The pandemic has accelerated the rise of environmental, social and governance (ESG) investing. However, argues Markus Müller, we must improve global standards continually if ESG is to fulfil its promise of driving economic growth while having a positive impact on the planet

Markus Müller

The coronavirus pandemic has made us acutely aware of risks to our existence and how fragile the global economic system is. Many are making the SARS-CoV-2 pandemic part of the reason why ESG has risen rapidly to the top of the global agenda, moving from rhetoric and ambition to action. At the same time, the many facets of ESG are being discussed and examined across a multitude of investment institutions, to establish what it really means and whether it serves a purpose at all.

In my view, ESG prompts a simple question about why and how we do things, as individuals, as investors and as companies.

ESG originally developed from institutional investors screening out negative risks in investment targets. Today, ESG is much more than a combination of investment ratings and exclusions. With the goal of sustainability as our objective, ESG offers a way of understanding and quantifying the non-financial dimension of economic activity and of avoiding the dangers of a ‘submerged iceberg’.

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This means identifying where the risks lie and developing innovative mitigation strategies. Mid- to long-term risk for an investor comes in many forms. Physical risks (damage or threat to physical assets due to natural or climate change) are accompanied by transition risks (business or investment risks on the journey towards a greener economy) and liability risks (reputational issues, breach of standards). These risks can affect companies in a variety of ways. Production disruption, raw material and share price volatility and capital destruction are just a few examples. Importantly, it all involves understanding nature as an asset, as an input factor in our production function.

Innovation means finding ways to avoid those risks while embracing change and preparing for new future-oriented businesses which are ESG-positive. This has two prerequisites. First, we need more data disclosure to measure the impact of what we are doing. Secondly, we need goals and an evaluation method. These two issues are linked: data will give us an understanding of the impact of economic activity and how to steer economic development, which in turn should allow us to refine these goals.

Systematic decision-making is more than just a means to an end in order to achieve an overarching, positive goal within the Purpose Economy. We must also ensure that, when looking at equitability of impact, a distinction is not merely made between labour- and capital-intensive activities. Rather, impacts should be considered in three ways: the impact of individuals (including companies); the impact of politics (including governments and institutions); and the impact of nature (including natural resources).

Fortunately, we already have broad goals. The UN Sustainable Development Goals and the linked UN Principles for Responsible Investment, along with the Paris Agreements as well as the (failed) Aichi Biodiversity Targets, have set the initial direction. But there is still no consistent global approach about how to go beyond these broad goals and to put them in a detailed synthesis with financial markets. Standards can help. Reporting is widening its scope: the Taskforce on Nature-related Financial Disclosures (TNFD) was recently launched to go beyond ESG scores and climate change, to include the risk factor represented by biodiversity loss. The International Financial Standards Reporting Foundation (IFSR) has also proposed the inclusion of sustainability standards within its constitution as it aims for the establishment of an International Sustainability Standards Board.

Read more: Dimitri Zenghelis on Investing in the Green Transition

So, we are advancing on multiple fronts, but the scale of the task here is enormous: even within rating agencies, ESG ratings and scores vary due to differing methodologies. Global sustainability standards for company reporting would allow integrating data, insights and ESG themes into business strategy, product-development cycles and risk management. Harmonised standards would also allow us to improve scoring, enabling a more sophisticated discussion of what exactly scores mean and the importance of a company improving its ESG score rather than just accepting it or simply trying to ‘game’ it.

At Deutsche Bank’s International Private Bank we continue to develop our methodology to make sense of this evolving landscape on global standards. We use ratings, drawing on the research and analysis of a leading third party provider, but it is important to consider these in context. We realise that we have to give firms credit for improvement on ESG metrics, for example. We also apply exclusions against sectors that go against UN goals and principles and generate long-term risks (around greenhouse gases, for example). Exclusions can also be applied on more individual value-based grounds.

Methodologies such as this require continual improvement through monitoring their effect on sustainability. But the priority should be to ensure that the impact of ESG on a client’s investments should be transparent and that they will lead to improved corporate behaviour on ESG issues. If we wish to make transparent the impact of our ESG activities, and if we want our economies to be ESG-positive, we need to all follow the same methods.

ESG is here to stay as a categorical imperative. It will, at the very least, slow down environmental degradation and will make the world and our lives richer and more meaningful.

Markus Müller is Global Head of the Chief Investment Office at Deutsche Bank’s International Private Bank. Find out more: deutschewealth.com/esg

This article was originally published in the Autumn/Winter 2021 issue.