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The growing case to embed climate risk in finance teaching

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The growing case to embed climate risk in finance teaching

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Chief financial officers, chief ­investment officers and their teams are in a prime position to help embed ­sustainability in their organisations — from strategy and operations to financing and reporting. Yet the change required for many finance teams is ­substantial.

A recent survey of senior finance professionals by the charity Accounting for Sustainability suggests that the profession is responding: 88 per cent agree that it is “very important” or “essential” to transform financial decision making to address the opportunities and risks posed by environmental and social issues.

Most organisations have developed at least some tools to integrate sustainability, alongside traditional financial data, into decision making.

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But only 9 per cent reported they were able to do so in a fully comprehensive way. Fifteen per cent felt they had the tools and techniques in place that they needed, though 46 per cent said these were under development.

Those of us who teach and conduct research in finance and accounting have a role to play to meet this demand.

We took part in a recent discussion between finance and accounting —professors and the Financial Times about best practices, successful innovations, and important concepts and themes.

It is now relatively uncontroversial to argue that climate change and nature loss bring direct risks to the profitability and cash flows of companies.

Physical risks arise from direct manifestations of climate change and include risks to firm facilities, operations, and supply chains.

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Transition risks and opportunities arise for business as regulatory incentives and consumer preferences push towards, for example, a lower emissions economy.

Mobilising private capital towards mitigation of, and adaptation to, environmental change is vital. The rules of the road, as defined in finance textbooks, must be refined to help understand and manage these risks.

But there are divergent views on how to respond. Some participants in the discussion felt a responsibility as professors to inspire a fundamental overhaul of finance and accounting pedagogy, and thought the fiduciary duty of financial officers must be redefined to view climate and social action through the lens of “citizen investors”, who consider many non-financial objectives.

For them, a core course in finance would seek to question the very purpose of finance. Ideally, it would pursue what appropriate actions financial officers could take to fulfil their more ­broadly defined duties, what powers they should exercise, what purpose they serve, and what evidence there is of what works.

Other finance professors — a larger group that includes the authors of this article — argue that a stronger focus on climate risks is justified within the existing frameworks we teach, and no big overhaul is needed. Students should consider new sources of extra-market risk, which require a multidisciplinary understanding and fall under the ­conventional responsibilities of both investment and corporate managers.

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When we teach about the cost of ­capital, for example, we highlight that stocks exposed to risks require a higher expected rate of return to be attractive, thus reducing the attractiveness of certain investments. Replacing discussion of macroeconomic risks (beyond the standard market risk factors) with others focused on climate and nature would highlight factors managers should take into account.

Another dimension is cash flow. Investing in climate change and sustainability presents a range of opportunities to generate returns and make a positive impact on the environment. These include leveraging tax incentives to invest in renewable energy projects (a booming business for investment banks due to recent legislation in the US and Europe), green bonds, electric vehicles and infrastructure.

This less radical perspective does not mean that non-financial objectives should never be considered in decision making.

Rather, it highlights that ­climate and nature risk management is already required — even of those investors with a narrower fiduciary duty to maximise risk-adjusted returns.

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Innovative teaching approaches on sustainability and finance through real-time case studies, industry speakers, data-driven exercises, out-of-the-box readings, and engaged, project-oriented learning experiences are welcome. The more creative, the better.

At our discussion with the FT, there was a shared belief that deans and other academic leaders in business schools should create more incentives for such forms of pedagogy.

We acknowledge that there is a still larger group of finance and accounting professors who are indifferent, opposed or of the view that sustainability has ­little or no place in core finance teaching and learning. We believe a broader debate will continue and welcome it.

This article is by Marcin Kacperczyk, a professor at Imperial College Business School; Andrew Karolyi, a professor and dean at Cornell University’s SC Johnson College of Business, and an advisory councillor to King Charles’s Accounting for Sustainability project; Lin Peng, a professor at Baruch College’s Zicklin School of Business; and Johannes Stroebel, a professor at New York University’s Stern School of Business. We are grateful to our colleagues David Pitt-Watson, Megan Kashner and John Tobin for helpful comments

Finance and climate: recommended reading from the authors

Climate Finance,” by Harrison Hong, Andrew Karolyi, and José Scheinkman, Review of Financial Studies (Volume 33, Issue 3, March 2020)

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Climate Finance,” by Stefano Giglio, Bryan Kelly, and Johannes Stroebel, Annual Review of Financial Economics (Volume 13, November 2021)

Seeking Virtue in Finance: Contributing to Society in a Conflicted Industry by JC de Swaan (Cambridge University Press, 2022)

What They Do With Your Money, How the Finance Industry Fails Us, and How to Fix It by Stephen Davis, Jon Lukomnik and David Pitt-Watson (Yale University Press, 2016)

The Ministry of the Future by Kim Stanley Robinson (Orbit Press, 2020)

Sustainable Investing in Equilibrium,” by Lubos Pastor, Robert Stambaugh and Lucian Taylor, Journal of Financial Economics (Volume 142, Issue 2, November 2021)

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Responsible Investing: The ESG-Efficient Frontier,” by Lasse Heje Pedersen, Shaun Fitzgibbons and Lukasz Pomorski, Journal of Financial Economics (Volume 142, Issue 2, November 2021)

Global Pricing of Carbon-Transition Risk,” Patrick Bolton and Marcin Kacperczyk, Journal of Finance (Volume 78, Issue 6, December 2023).


Recommendations from a wider group of finance professors:

Investments by Bodie, Kane and Marcus

Principles of Corporate Finance by Brealey, Myers, Allen, Edmans 

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Climate Finance by Giglio, Kelly and Stroebel

Managing Climate Risk in the US Financial System

Grow the Pie by Alex Edmans

Global Reporting Initiative “Double Materiality Concept – Application & Issues”

Woke Inc. by Vivek Ramaswamy

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IPCC (2022) “Sixth Assessment Report”

Unsettled” by Steve Koonin BenBella Books

Net Zero Investing for Multi-Asset Portfolios by Hodges, Ren, Schwaiger and Ang Journal of Portfolio Management 

Aggregate Confusion by Berg, Kolbel and Rigobon Review of Finance

Do ESG Factors Influence Firm Valuation? Evidence from the Field by Karolyi, Bancel and Glavas

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Biodiversity Finance: A Call for Research into Financing Nature by Andrew Karolyi and John Tobin-de-la-Puente (2023) Financial Management

The Future We Choose: The Stubborn Optimist’s Guide to the Climate Crisis by Christiana Figueres and Tom Rivett-Carn

How to Avoid a Climate Disaster by Bill Gates https://www.penguin.co.uk/books/317490/how-to-avoid-a-climate-disaster-by-gates-bill/9780141993010

False Alarm: How Climate Change Panic Costs Us Trillions, Hurts the Poor and Fails to Fix the Planet by Bjorn Lomborg


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Finance

German finance minister wants to scrap spousal tax splitting

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German finance minister wants to scrap spousal tax splitting

Last weekend, several thousand people took to the streets in Munich to demonstrate against abortion and assisted suicide. One speaker made an extremely dramatic plea against what he called the “culture of death” that has allegedly taken hold in Germany. One sign of this, the speaker argued, was that the government is planning to abolish a regulation known as “spousal tax splitting.”

Is tax law really relevant to deep philosophical debates on the sanctity of life? It is even a matter of life and death at all? Surely we needn’t go that far? In any case, the intense political uproar surrounding the new debate on whether to abolish spousal tax splitting is notable, even by today’s standards of populist outrage.

An advantage for couples with widely divergent incomes

The row was sparked by Germany’s vice chancellor and finance minister, Lars Klingbeil, of the center-left Social Democratic Party (SPD), who said he wanted to abolish and replace the joint taxation of spouses’ income, a system that has been in place since 1958.

How exactly does spousal tax splitting work? In Germany, married couples (and since 2013, couples in civil partnerships), can choose to have their income assessed jointly by the tax authorities.

It means that the taxable income for both spouses together is halved – as if both partners had each earned an equal half of the income. Their tax liability is then determined by simply doubling the income tax due on one half.

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As people who earn more pay higher taxes in Germany, this system benefits couples where one partner (and often this is still the man) earns significantly more than the other (in practice often the woman).

Lars Klingbeil
Lars Klingbeil thinks spousal splitting is outdated and costs the state too muchImage: Bernd von Jutrczenka/dpa/picture alliance

Costs of up to €25 billion per year

If for example one partner earns €60,000 ($70,512) a year and the other partner earns nothing, the couple will be taxed as if they earned €30,000 each. In this example, the couple would save nearly €5,800 in taxes per year compared to the amount they would owe if both partners filed their taxes separately. According to the Finance Ministry, spousal tax splitting costs the government a total of up to €25 billion annually.

Some critics have long viewed splitting as a tool to keep women out of the labor market, because the more a woman earns, the larger her tax burden becomes. Klingbeil seems to agree, arguing on ARD television in late March that the system was “out of step with the times.” The spousal splitting system reflects “a view of women and families that is completely at odds with my own,” he said.

Chancellor Merz said to be in favor of splitting

On Monday of this week, Klingbeil got some surprising support on this from Johannes Winkel, head of the youth wing of the conservative Christian Democratic Union (CDU).

“Given the demographic reality, the government should create incentives to ensure that both partners in a relationship are employed,” Winkel told the Funke Media Group. “In the future, tax relief should primarily be granted to married couples when they are facing hardships related to raising children.”

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But the chancellor is a vocal skeptic of the proposal. “I am not convinced by the claim that joint filing for married couples discourages women from working,” Friedrich Merz said at a conference organized by the Frankfurter Allgemeine Zeitung newspaper. “Marriage is a relationship based on shared income and mutual support. And in a marriage, income must be treated as a joint income for tax purposes, not separately.”

Berlin under pressure to fix pensions, health care and taxes

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Klingbeil’s alternative plan

At around 74%, the labor force participation rate for women in Germany is one of the highest in Europe, but half of them work part-time.

Klingbeil’s idea is to replace the existing system with a more flexible approach: Both partners would be able to distribute tax-free income among themselves in such a way that it minimizes their tax liability. This would allow the couple to continue enjoying a tax advantage, albeit not to the same extent as before. And whether one partner earns more than the other would become less important.

However, it remains to be seen whether Klingbeil will be able to push through his proposal. Aside from Germany, similar regulations offering tax benefits to couples exist in Poland, Luxembourg, Portugal and France.

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This article was originally written in German.

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Departing inspector general targets Council Office of Financial Analysis

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Departing inspector general targets Council Office of Financial Analysis

The $537,000-a-year office created in 2014 to advise the City Council on financial issues and avoid a repeat of the parking meter fiasco has failed to deliver on that mission, the city’s chief watchdog said Tuesday.

Days before concluding her four-year term, Inspector General Deborah Witzburg said a shortage of both adequate staff and financial information closely held by the mayor’s office prevents the Council’s Office of Financial Analysis from helping the Council be the the “co-equal branch of government” it aspires to be.

In a budget rebellion not seen since “Council Wars” in the 1980s, a majority of alderpersons led by conservative and moderate Democrats rejected Mayor Brandon Johnson’s corporate head tax and approved an alternative budget, including several revenue-generating items the mayor’s office adamantly opposed.

But Witzburg said the renegades would have been in an even better position to challenge Johnson if only their financial analysis office had been “equipped and positioned to do what it’s supposed to do” — provide the Council with “objective, independent financial analysis.”

“We are entering new territory where the City Council is asserting new, independent authority over the budget process. It can’t do that in a meaningful way without its own access to financial analysis,” Witzburg told the Chicago Sun-Times.

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Chicago Inspector General Deborah Witzburg’s latest report focuses on the Chicago City Council’s Office of Financial Analysis.

Jim Vondruska/Jim Vondruska/For the Sun-Times

But the Council’s financial analysis office, she added, “has never been equipped or positioned to do what it needs to do. It needs better and more independent access to data, and it needs enough staff to do its job. It has a small number of employees and comparatively limited access to data.”

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The inspector general’s farewell audit examined the period from 2015 through 2023. During that time, the financial analysis office budget authorized “either three or four” full-time employees. It now has a staff of five .

Witzburg is recommending a staffing analysis to identify how many people the financial office really needs — and also recommending that the office “get data directly” from other city departments, “ rather than having it go through the mayor’s office.”

The audit further recommends that the office develop “better procedures to meet their reporting requirements” in a timely manner. As it stands now, reports are delivered “sometimes late, sometimes not at all,” the inspector general said.

“We find that those reports have been both not timely and not complete in terms of what they are required to report on and that those reports therefore have provided limited assistance to the City Council in its responsibility to make decisions about the city’s budget,” she said.

The Council Office of Financial Analysis responded to the audit by saying it hopes to add at least three full-time staffers in the short term and has made “some progress” over the last three years in improving their access to data, but not enough.

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The office was created in 2014 to provide Council members with expert advice on fiscal issues.

For nearly two years the reform was stuck in the mud over whether former 46th Ward Ald. Helen Shiller had the independence and policy expertise to lead the office.

Shiller ultimately withdrew her name, but the office was a bust nevertheless. In an attempt to breathe new life into it, sponsors pushed through a series of changes.

Instead of allowing the Budget chair alone to request a financial analysis on a proposal impacting the city budget, any alderperson was allowed to make that request.

The office was further required to produce activity reports quarterly, not just annually.

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Now former-Budget Chair Pat Dowell (3rd) then chose Kenneth Williams Sr., a former analyst for the office, as director and gave him the “autonomy” the ordinance demanded.

Two years ago, a bizarre standoff developed in the office.

Budget Committee Chair Jason Ervin (28th) was empowered to dump Williams after Williams refused to leave to make way for a director of Ervin’s own choosing.

The standoff began when Williams said he was summoned to Ervin’s office and told the newly appointed Budget chair was “going in a different direction, and I’m putting you on administrative leave” with pay.

“He took all my credentials and access away. I would love to come to work. I wasn’t allowed to come to work,” Williams said then.

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Williams collected a paycheck for doing nothing while serving out the final days remainder of a four-year term.

Ervin’s resolution stated the director “may be removed at any time with or without cause by a two-thirds” vote or 34 alderpersons. He chose Janice Oda-Gray, who remains chief administrator.

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Reilly Barnes Returns to Little League® as Purchasing/Finance Assistant

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Reilly Barnes Returns to Little League® as Purchasing/Finance Assistant

Little League® International has announced that Reilly Barnes accepted a new role as Purchasing/Finance Assistant, effective April 6, 2026. Barnes transitions from a temporary Purchasing Assistant to this full-time position to assist in the year-round demands of purchasing for the organization, as well as the region and Little League Baseball and Softball World Series tournaments. 

“We are thrilled to welcome back Reilly to our team as a full-time Purchasing/Finance Assistant. Reilly’s prior experience, time management, and attention to detail make him an invaluable asset to the purchasing team,” said Nancy Grove, Little League Materials Management Director. “We look forward to the positive contributions he will have on our organization.” 

In this role, Barnes will be responsible for processing purchase requisitions, coordinating souvenir products, and tracking order fulfillment. He will also assist with evaluating suppliers, reviewing product quality, and negotiating contracts for effective operations.  

After most recently working as a Logistician Analyst at Precision Air in Charleston, South Carolina, Barnes, a Williamsport native, returns after honing his skills in the fast-paced environment. Prior to his time at Precision Air, Barnes served as a Procurement Specialist at The Medical University of South Carolina, where his expertise and knowledge were instrumental in supporting both education and healthcare needs.  

“I am thrilled to return to Little League in this full-time role,” said Barnes. “Coming back to my hometown and having the opportunity to work for an organization that has played such a special part of my upbringing means a lot. I can’t wait begin this new opportunity.” 

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Barnes graduated from the University of Pittsburgh in 2022 with a B.A. in Supply Chain Management, Finance, and Business Analytics.  

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