Aoifinn Devitt: Brought to you with the kind support of Federated Hermes Inc., a leading global investment manager. Guided by their conviction that responsible investing is the best way to create wealth over the long term, their investment solutions span equity, fixed income, alternative and private markets, multi-asset and liquidity strategies, and a range of separately managed accounts distributed through intermediaries worldwide. Our next guest believes that we are currently facing another pandemic, a pandemic of greenwashing. Find out how images of bathtubs, as well as diets, can help us understand the enormity of the problems we face with climate change and how to address them. I’m Aoifinn Devitt, and welcome to the 50 Faces Podcast, a podcast committed to revealing the richness and diversity of the world of investment by focusing on its people and their stories. I’m joined today by Fabiola Schneider, who is a doctoral researcher at UCD Michael Smurfit Business School, where she focuses on sustainable finance with a particular focus on progressing the UN Sustainable Development Goal agenda. She is research co-lead on GreenWatch, which applies artificial intelligence to detect greenwashing in the market. She’s also passionate about issues of diversity, equity, and inclusion. Welcome, Fabiola. Thanks for joining me today.
Fabiola Schneider: Thanks so much for having me. My pleasure.
Aoifinn Devitt: Well, let’s start with where you grew up, what you studied, and how sustainable finance called to you as a career.
Fabiola Schneider: Happy to. So I’m from a town close to Frankfurt in Germany. It’s mainly known as founding ground for the car manufacturer Opel and its vicinity to Frankfurt Airport. I didn’t take a straight line to sustainable finance or academia, actually. I started off in Düsseldorf where I did my undergrad in business chemistry. That’s an interdisciplinary Bachelor of Science where you have classes with commerce students, but also natural scientists. Initially, I was interested in sustainability in supply chains and the chemical industry. I was thinking about maybe doing environmental consulting. So I did a few internships and exposed myself to both the consulting world and also the chemical industry. But I came to realize that what really seems to be driving decisions is financial considerations. So to me, it became clear that the biggest lever for driving impact could actually be finance. Hence, I decided to do the Master of Science in Energy and Environmental Finance at UCD Michael Smurfit Business Graduate School here in Dublin. After completing my studies, I interviewed with the usual suspects of finance, State Street, and so on. But even the atmosphere in those corporate interviews didn’t really resonate with me. So when my program director asked me whether I had considered doing a PhD, I had to admit I didn’t consider that, but that I would be willing to listen. And here we are nearly 4 years later, and I’m still amazed by the unique opportunities that academia offers in terms of freedom and self-determination.
Aoifinn Devitt: And I know there’s a lot of interest in the sustainable finance area at the, say, the operator level with among asset managers and a lot of hiring going on there. What level of interest are you seeing at the academic level? Like, are you seeing students wanting to specialize in this and wanting to add it to their sweet say of electives.
Fabiola Schneider: Yes, certainly there’s a big drive. Sustainable finance has come from niche to mainstream, especially ESG investing continued to soar in 2021. According to some estimates, one-third of assets contain sustainable investment these days. And while ESG doesn’t equal impact, I still see this growth as a very positive development. The conversation changed, the topic seems to slowly reach all spheres and stakeholders. And actually, as you mentioned, especially in younger generations, we see a big drive for this. The master’s that I did back then actually now has been restructured and renamed to Renewable Energy and Environmental Finance to reflect upon change in interest of students. So that’s really positive. We also see a lot of climate finance masters popping up. So it’s really changing both from the demand side, but also in terms of industry demand, as in this is now a skill that will be needed in the future and companies request that. So on the one hand, it’s students that are passionate about this subject, but also the industry requesting it from their new hires. Another aspect, though, maybe a natural part of market development, that with this increase in quantity, there’s a slight decrease in quality. I would say we’re unfortunately in the pandemic of greenwashing now. So the next step after this incredibly fast-paced growth of the topic is for the market to mature and to differentiate between true sustainability or true change towards green and the much easier and much more common lip service that we are seeing now.
Aoifinn Devitt: That’s so interesting. And speaking of lip service, it’s a good segue to start talking about some of your research. And you’ve got a lot to cover here. So let’s kick off. First of all, the work you’re doing on greenwashing. Greenwashing seems to have made its way into the kind of the common language now. Everybody thinks they know what it is, probably not always aware when it’s being done to them. Can you talk a little bit about the work that Greenwatch does and how AI is applied to that area?
Fabiola Schneider: Absolutely. So distinguishing between truly green change and greenwashing is a key component of a sustainable transition. There’s plenty shapes of green. And unfortunately, we see all of them, but we see also a lot of greenwashing, because naturally, the latter is much easier for corporations than the former, which is evident in the current greenwashing pandemic. There’s plenty of incentives to be perceived or to portray yourself as green. There’s increased consumer demand, better hiring processes, better access to finance, and so on. But there’s usually a cost and effort attached to really driving change and changing your current system. There’s multiple sides you can look at this. For example, the EU did a check of websites against consumer law to identify greenwashing, and they found that half of green claims lack evidence. It’s quite shocking. We at Greenwatch did take a different perspective. We look at it from the investor perspective. So we’re looking at corporate greenwashing from entities rather than the consumer product level. Still, our findings mirror what has been published. Greenwashing really is pervasive through all industries. So we looked at corporations from all industries and we find similar results. At Greenwatch, we envision a world where investors and actually all other stakeholders can assess the authenticity of green claims quickly, efficiently, and consistently. So in today’s world, AI is great for classification problems already, such as the one we address at Greenwatch, where we identify claims and classify them. In AI, you always have a key decision to make. You can either lean towards false positives or false negatives. The former, so towards false positive, means you might miss some, but you can also have too many. So that’s always the trade-off that you have to make. At Greenwatch, we decided to lean towards having too many positives, as in false positives. That’s why we have a human in the loop who then verifies our positives. But if we did the opposite, that would mean we might miss some of the positive classifications, which means some greenwashing would get away, which we want to avoid. AI in this sense is key to support us though, because the sheer amount of data that is out there these days is too big to be reviewed by individual humans. We live in the digital age, there’s new information 24/7, and especially When you look at advertisements, it’s too much for a single human or even a team of humans to assess. People say data is the new oil. I think we’d rather run the risk of drowning in data, which adds a nice twist to the oil analogy.
Aoifinn Devitt: That’s so interesting. Do you think our starting point has to be skepticism? So whenever we have a green claim, should we be suspicious and sort of wait for the evidence first? Do you think that that will create maybe frictions and kind of barriers to trust, or do you think that’s an important part of ensuring that these claims mean something?
Fabiola Schneider: I think critical thinking should be the basis for any judgment we make. We try to teach that to students as well. In today’s world, it can be fairly easy to revisit some information and to confirm. So it’s good life advice to always look with a critical mind. At the same time, of course, we do need trust. That’s what community and society runs on. That being said, the financial industry isn’t exactly at a high point of trust to begin with. So when there’s been claims made in the financial sector, as we analyze in Greenwatch for the investors, I think critical thinking definitely is good advice.
Aoifinn Devitt: And in terms of the scale of the problem, I mean, certainly there has been a proliferation of green products or products with ESG in the name or SDG in the name. Equally, there’s a lot of pressure on companies to make change and be seen to make change. Equally around net zero, there’s a lot of, I suppose, a lack of understanding as to how we get to that path and what it means exactly. Do you see that the problem of greenwashing is increasing? Has it got worse over time? Is it continuing to get worse?
Fabiola Schneider: Certainly, that’s because the interest in green has increased so much. That’s what I mentioned earlier. It’s a tandem. While the market is increasing and the interest is increasing, so is the amount of greenwashing increasing. And that’s because so far no one is holding anyone accountable, neither the firms nor the investors. And that’s where Greenwatch comes into place. And we try to provide that to the market and really hold people and firms accountable to their statements and their claims. Of course, we’re not the only ones responsible for that. There’s legislation coming into place. Really, the first step is to define what green really is, because in order to detect greenwashing, that’s the first step. This is green and this is not.
Aoifinn Devitt: And actually, on the concept of definitions, that’s a good segue to your work in taxonomy. Can you talk about what you’re doing there in terms of your work in taxonomy and whether you believe that the current taxonomy is fit for purpose.
Fabiola Schneider: It’s very much a hot topic at the moment, precisely for this pandemic of greenwashing that we’re seeing, and it’s supposed to be a first tool to address it. It closely links to our work at Greenwatch, therefore, because it will enable anyone to detect greenwashing as it gives a very clear definition of what green actually is. Let me give you a bit of background maybe first. So the taxonomy is part of the EU’s action plan on financing sustainable growth. It’s meant to be a reporting enabler and a transition tool that provides clarity on what constitutes an environmentally sustainable activity. Here’s the first big catch: it’s at activity level, not entity level. More so, it’s important to stress that the taxonomy covers 6 environmental objectives, and they’re all equally weighted. Climate change mitigation and climate change adaptation are 2 of them, but there’s also circular economy, pollution prevention, water and marine resources, and biodiversity. For the first two criteria on climate change, the technical screening criteria have already been published and the first so-called delegate act has been adopted by the European Commission. Maybe let me elaborate a bit on the process. So the European Commission set the overarching ambition that’s called the taxonomy regulation and it’s formally law. Formally, then afterwards there’s the subsequent delegate acts which specify criteria and are a bit more detailed. Those delegate acts get voted on by the Member State Council and the European Parliament. The taxonomy regulation calls for a science-based approach, and that’s why there’s the Platform on Sustainable Finance by IServicerpa. It’s an expert panel specifically appointed to advise the European Commission on this taxonomy. Most recently, a complementary delegated act has been published, which additionally outlines criteria for the inclusion of nuclear and gas as so-called transitional activities. It’s much more a product of political power than scientific backing, which is also obvious in the process. The Platform on Sustainable Finance, so the expert scientific gremium created to give evidence-based recommendations, has been sidelined on this and only got very little time to comment on the final draft when it was already written. Our response to this, our official feedback, was published on Monday, and it outlines why the proposed criteria are absolutely not fit for purpose. The taxonomy is a hugely ambitious project that could have a tremendous impact in directing capital where it’s needed to get us to net zero.. And while the first delegated act is decently suitable to fulfill this ambition, the newly added complementary delegated act stands in great contrast to the overarching purpose of the tool. It’s not fit for 55, it’s not according to the Green Deal ambition, and it will hamper our progress towards reaching the Paris ambition. I really hope the European Commission reflects on our feedback and reconsiders, or if it goes through, that either the Member State Council or the European Parliament find a majority vote to vote down this greenwash proposal.
Aoifinn Devitt: It’s interesting that you mentioned the lobbying aspect and perhaps the fact that some of this was the outcome of lobbying. Based in the US where I am, I think certainly many of these issues have taken on a political mantle, and that is unfortunate because it muddies the waters, of course. So just around the— I’ll say first on the political side, were you encouraged by some of the bilateral or multilateral communications that came out of COP26? And did you see that there is— we’re moving in the right direction, at least in terms of momentum and action?
Fabiola Schneider: Sure, I would always advocate multilateral communication and collaboration. But what struck me most with COP26 was that despite being announced as the most inclusive summit on record, about two-thirds of civil society organizations who usually would send delegates to COP have not traveled to Glasgow for multiple reasons. Vaccine apartheid, changing travel rules, incredibly high travel costs, and also Britain’s complex immigration system. So actually, I think COVID, this crisis, really gave a good outlook at what happens once the world gets a feeling of emergency. It seems it only made the gap between rich and poor or powerful and powerless more visible. So for me, it was positive that at least at COP, despite this obvious non-inclusion of people, it was announced that £165 million will be made available to tackle climate while change but simultaneously addressing the inequalities that make women and girls more vulnerable to climate change. So, to empower them to take climate action, that was very promising. In terms of diversity, the UN stressed how utterly needed this is, because globally women are more vulnerable to the effects of climate change than men. That’s in part because they just constitute a larger majority of the world’s poor, but also because they often depend on small-scale farming for their livelihoods and that’s particularly vulnerable to climate change. According to some reports, women and children actually comprise 80% of those displaced by climate-related disasters.
Aoifinn Devitt: It’s so interesting, as I mentioned at the intro, that you are quite interested in diversity and inclusion topics. And here already we can see just how intertwined all of these topics are.
Fabiola Schneider: I really think they need to be looked at in tandem. Yes.
Aoifinn Devitt: Yeah, exactly. One of the items you mentioned before is around net-zero targets. And certainly we’ve seen everyone from underlying institutional investors to corporations adopt net-zero targets. Can you talk a little bit about that in terms of, are we all speaking the same language regarding that? Do you expect that these targets will be achievable? And are we going about it in the right way?
Fabiola Schneider: That’s some very loaded questions. Generally, yes, we do need net-zero targets. It is a step in the right direction. But the devil really is in the detail. And making great promises for around 2050 isn’t a substitute for concrete and decisive action now. So first, I’d like to emphasize that the shape of the trajectory really matters. Are we talking about a linear decline, the 7% year-on-year reduction to global net zero in 2050 based on IPCC data and the UN Emissions Gap Report? The shape of the curve really determines the cumulative emissions over time, and that’s what really matters. We cannot do all front-loading emissions and then a sharp drop to zero after 2045, at worst based on some technological innovation that’s not yet existent. This bathtub analogy is often used to explain emissions. So in order for the bathtub to not overflow, you need to fully close the faucet, right? 100%. We don’t need 80% reductions or 90% reductions. We need to stop adding greenhouse gases to the atmosphere. We need to stop adding water to our bathtub. So net-zero 2050 means we shut the faucet in 2050. Yet it still matters how much water is flowing before. It’s very different whether you slowly reduce the inflow and then fully close in 2050 Maybe some water will spill on the floor, sure, but we managed to avoid most severe consequences. You can also go full power, full flow until last minute and then close it. But our imaginary bathtub is already nearly full now in 2022. We’re approaching several critical tipping points. If we go full speed until 2050, not only is our bathtub gonna overflow, we’ll drown as the entire bathroom starts filling up, even if the faucet then is finally closed in 2050. So the first one really is the trajectory. The next point is this small word, net. That’s the whole debate on abatement versus offsets. It’s also a very important one. Small word, big implications. A lot of current net-zero plans rely heavily on offsetting emissions. While yes, there is and always will be hard-to-abate last emissions, this offsetting is really only for those last-mile emissions when you’ve tried everything else, not for example, for the energy sector where we today have plenty of viable alternatives to burning fossil fuels. I read headlines like, “World’s first certified carbon neutrally produced oil sold,” and I have to do a double take. Bloomberg did a nice piece titled, “The Fictitious World of Carbon-Neutral Fossil Fuels: How to Sell Carbon-Neutral Fossil Fuel That Doesn’t Exist.” In that piece, they quote that carbon-neutral gas shipments come at less than $6 per ton of carbon dioxide equivalents. Clearly, voluntary markets at the moment are not working. We are in a decade where abatement has absolute priority over offsetting. Only last emissions that cannot be reduced otherwise should be offset using regulated markets with fixed decreased carbon budgets. And then there’s the whole issue of avoided emissions, carbon credit instruments where a high emitter takes credit for helping someone else avoid a future emission. Imagine you are on a diet and you just tell someone else to eat less. Also, it’s often just accounting tricks and impossible to credibly verify how much future emissions you saved. Overall, proponents of offsets postulate that all carbon is equal, but that omits that the cost of avoiding carbon isn’t equal. The rich are benefiting from the carbon space of the poor. So justice is the third thing that I really would like to stress here. Net zero 2050, sure, that’s a global average, but the developed world really needs to hit net zero earlier, developing world later. So big corporations now making big pledges should really target earlier than 2050. My last point is then on the scope of emissions that also matters in the pledge. The greenhouse gas protocol defines 3 types of emissions. The first, Scope 1, is direct emissions. So that’s actually burning fossil fuels and you can see it coming from a chimney. The second is energy consumed, so emissions from, for example, your electricity. And then lastly, Scope 3, that’s your supply chain emissions, value chain emissions. It goes both ways. Upstream and downstream. My research usually looks at the fossil fuel sector, and there you have the so-called Scope 3 use-of-product emissions, and they, according to Carbon Tracker, account for up to 90% of emissions. That’s because ultimately, when you burn fossil fuels, the product of an oil company, you will always emit greenhouse gases. So addressing this inherently unsustainable business model is key for the transition of any fossil fuel company. Which is why Scope 3 use-of-product emissions need to be included in any credible net-zero pledge. With regards to oil and gas firms, it’s probably also important to stress that pledges need to target absolute, not relative emissions. So not intensities, but actual emission reductions, absolute emission reductions. Maybe that’s a good final concluding comment. We do need absolute sustainability, not relative sustainability. To come back to the example of a diet, there’s no point claiming you did well because in your group everyone gained 10 kilograms, but you only gained 5. So while net zero targets are important, it is even more important to credibly outline the path on how to reach them and be transparent about one’s transition plan.
Aoifinn Devitt: Well, you’ve expressed that extremely clearly, and I think some very helpful analogies there. I particularly like the bathtub analogy because as you were describing a bath filling, I’m thinking of the plug hole being open perhaps, or a crack in the bath. I mean, there are clearly some ways of defraying that water buildup. And just before we discuss divestment and engagement, I wanted to ask you about the offsets today. And you mentioned that it isn’t enough to simply offset, but there are, say, carbon sinks or, you know, reforestation was a pledge from COP26. What kind of offsets do you see as being the most scalable and effective?
Fabiola Schneider: Again, to stress that offsetting should never be in lieu of abating. It should be independent of it. And we should focus on retaining the ones that we already have and not offsetting The natural carbon sinks that we have, the oceans, take up most of the carbon that is being produced. And again, we have those critical tipping points where we can have a huge amount of greenhouse gases being released. I think the largest direct carbon capture offsetting scheme just got in place and it can only capture the emissions of about 800 cars. So really to believe in offsets as a way out of our crisis is just not credible. So I would always look at forestation projects more from a different angle, not in terms of offsetting emissions, but always to retain biodiversity and all the big advantages that these projects have, and never as a strategy to reduce our greenhouse gas emissions.
Aoifinn Devitt: That’s very clear. So just now moving to another hot topic, which is engagement versus divestment. And certainly, there seems to be more now being said about active engagement and how being essentially inside the tent perhaps one can affect more change than being outside the tent and divesting. How do you see the current debate and what do you see as being most effective?
Fabiola Schneider: Yeah, so together with my supervisor, Professor Andreas Hörbner, I’m actually working on a conceptual paper where we advocate for engaging inequities and denying that. So in the divestment versus engagement debate, often dubbed voice versus exit, it’s important to differentiate between asset classes, especially with regards to the market where they are mainly active. Let’s start with divestment in equities. So equities are predominantly active on secondary markets, meaning if I divest, I sell it to somebody else. While that can be a strong political symbol and through share prices may impact acquisition strategies and so on, it has no direct impact on corporate cash flow. Money that is already in the firm, already in the market, changes hands on the secondary market. With fixed income, that’s different. Naturally, debt has a predetermined maturity usually, when it needs to be repaid, it comes due. Yet most companies don’t repay that debt given cash constraints and leverage strategies, they refinance. So debt, in contrast to equities, goes through refinancing cycles and keeps hitting the primary markets, fresh issuance. This also means that investors routinely face the decision to roll over debt and to thereby provide fresh cash to the company. And what we try to communicate is the big opportunity this poses. Because in the time before debt is due and must be repaid or refinanced, let’s say the 100 days before that, that’s really the key moment to influence for any investor that wants to drive impact. Here, investors have a lot of negotiation power because the company needs that fresh cash. But now the next question: so how could a bond investor engage? How could he make demands? Well, that’s easy. She can demand covenants. Financial covenants have been routinely agreed, so firms are familiar with the concept on both sides. Now, instead of financial metrics, the debt can be linked to sustainability KPIs, for example, greenhouse gas reductions. In order for a bond to be Paris-aligned, the company would need to reduce their emissions by at least 7% year on year, as mandated in, for example, the EU’s Paris-aligned benchmark and also called for in the UN Emissions Gap Report. If the company fails to do so, the debt gets more expensive. To my great delight, I actually recently saw on Bloomberg that sustainability-linked loans and bonds were the fastest-growing scenes in the ESG fixed income market in 2021. While of course those exact targets will need to be scrutinized with regards to their level of ambition and potentially greenwashing, linking back to what we just talked about for net zero, I’m very pleased with this development and I hope that investors wake up to the big power they have there.
Aoifinn Devitt: That’s so interesting. I feel like a child in a candy store right now. There’s so many topics that you have knowledge on that I really try to choose which one to ask you about next. But I suppose just in terms of what you’re working on, clearly now is cutting edge. My last question about your research topics is, if you were to look forward to the next 5 years, is there any one area, say, of technology or advancement that you think is going to be— it really excites you today and you think is going to grab our attention in the years ahead?
Fabiola Schneider: Maybe within my field of finance, I really enjoy taking the human factor into account. So for example, topics that fall under behavioral finance and at the intersection to other social sciences and anthropology, for example.. It can really offer a refreshing perspective personally after mainly working on gigantic spreadsheets or even worse policy text. Something I came across recently is, take for example standard economic theory where classical stability analysis suggests that the population will only change its behavior if 51%, so the majority of the group initiates change. But now studies carried out by psychologists actually find that minorities as of 25% can drive change. This translates to activist groups at 25% would be able to change the social norms in their communities. I think we tend to underestimate the power that a few dedicated people can have to shake up well-modeled systems. I’ve personally met some of the Fridays for Future activists, and I was very impressed with the level of commitment that young people show for a cause so early in their lives. That really has me optimistic for the future.
Aoifinn Devitt: It’s so interesting because when you throw in social media to that, as well as perhaps the turmoil in our lives that COVID wrought, and how that has perhaps made us more resilient, more adaptable. And then I think around the behavior, and I spoke about this with Joel Morland, around people’s feeling about doing good, whether they feel that that should involve an element of sacrifice or whether there can be a belief that doing good is the double bottom line makes sense. So I think there’s probably a lot more work to do on that, but we are going to hear a lot more about it.
Fabiola Schneider: Absolutely.
Aoifinn Devitt: Let’s just have a few closing questions going back to some personal reflections. So throughout your career so far, it’s very much mid-career and there’s a huge amount that we’ve covered. Have there been any key people who’ve really motivated you or even, you know, just in life in general?
Fabiola Schneider: So for my career, that’s very obvious and clear. We have my supervisor, Professor Andreas Höppner, and also Theodore Kojiyano, who was a postdoc back when I met him at UCD. They showed me a very different side of academia, one that’s very tangible and actionable, and their relentless energy when facing the often frustrating battles in sustainability is really inspirational. But since you’re asking about my personal story, I must say I really hope I took away some learnings from the way my mom raised me, or us. A single parent and a part-time nurse, she always puts us kids first, spending her limited financial resources on our hobbies and buying organic food because she believes that’s just the right thing to do. She always cared for problems in the world. Of course, as a spiteful teenager, you’re immune to advice, but looking back, I think it profoundly shaped my values and my drive for sustainability today.
Aoifinn Devitt: And speaking of your values and your drive for sustainability, is there any particular creed or motto that you live by?
Fabiola Schneider: In fairness, you gave me a heads up on this question, and I checked a few of the other very interesting podcasts that you already published. So I did have time to reflect on this. I thought about quoting Oscar Wilde, which seems like a great fit, both with your Irish background and the topic of diversity. I really enjoy just reading him over and over again, increasingly the older I get. Yet any statements I picked just seemed pretentious in the end. So I think I’ll just go for a simple, be kind. Besides the fact that a lot of the world problems I think could be solved by a little bit more kindness, I’ve certainly also found for myself that it delivers much more happiness to meet anything or anyone, including myself, with kindness.
Aoifinn Devitt: Well, that’s a wonderful way to end our conversation. Because you really do embody the integration of academic work with our daily lives and with the lives we lead professionally. And that is done very rarely, unfortunately. Academic research is not translated into workable plain English, and then I think a lot of it gets lost and is not usable. So what you’ve done here is translate a wide range of highly technical topics into very relatable and understandable and digestible components. So thank you so much for that and for sharing your insights with us.
Fabiola Schneider: That’s a great compliment. Thank you. I hope your listeners find this insightful and feel free to reach out if you have any questions.
Aoifinn Devitt: Absolutely. Well, we’ll put some links in the show notes. I’m Aoifinn Devitt. Thank you for listening to the 50 Faces Podcast. If you liked what you heard and would like to tune in to hear more inspiring investors on their personal journeys, please subscribe on Apple Podcasts or wherever you get your podcasts. This podcast is for informational purposes only and should not be construed as investment advice, and all views are personal and should not be attributed to the organizations and affiliations of the host or any guest.
Aoifinn Devitt: Brought to you with the kind support of Federated Hermes Inc., a leading global investment manager. Guided by their conviction that responsible investing is the best way to create wealth over the long term, their investment solutions span equity, fixed income, alternative and private markets, multi-asset and liquidity strategies, and a range of separately managed accounts distributed through intermediaries worldwide. Our next guest believes that we are currently facing another pandemic, a pandemic of greenwashing. Find out how images of bathtubs, as well as diets, can help us understand the enormity of the problems we face with climate change and how to address them. I’m Aoifinn Devitt, and welcome to the 50 Faces Podcast, a podcast committed to revealing the richness and diversity of the world of investment by focusing on its people and their stories. I’m joined today by Fabiola Schneider, who is a doctoral researcher at UCD Michael Smurfit Business School, where she focuses on sustainable finance with a particular focus on progressing the UN Sustainable Development Goal agenda. She is research co-lead on GreenWatch, which applies artificial intelligence to detect greenwashing in the market. She’s also passionate about issues of diversity, equity, and inclusion. Welcome, Fabiola. Thanks for joining me today.
Fabiola Schneider: Thanks so much for having me. My pleasure.
Aoifinn Devitt: Well, let’s start with where you grew up, what you studied, and how sustainable finance called to you as a career.
Fabiola Schneider: Happy to. So I’m from a town close to Frankfurt in Germany. It’s mainly known as founding ground for the car manufacturer Opel and its vicinity to Frankfurt Airport. I didn’t take a straight line to sustainable finance or academia, actually. I started off in Düsseldorf where I did my undergrad in business chemistry. That’s an interdisciplinary Bachelor of Science where you have classes with commerce students, but also natural scientists. Initially, I was interested in sustainability in supply chains and the chemical industry. I was thinking about maybe doing environmental consulting. So I did a few internships and exposed myself to both the consulting world and also the chemical industry. But I came to realize that what really seems to be driving decisions is financial considerations. So to me, it became clear that the biggest lever for driving impact could actually be finance. Hence, I decided to do the Master of Science in Energy and Environmental Finance at UCD Michael Smurfit Business Graduate School here in Dublin. After completing my studies, I interviewed with the usual suspects of finance, State Street, and so on. But even the atmosphere in those corporate interviews didn’t really resonate with me. So when my program director asked me whether I had considered doing a PhD, I had to admit I didn’t consider that, but that I would be willing to listen. And here we are nearly 4 years later, and I’m still amazed by the unique opportunities that academia offers in terms of freedom and self-determination.
Aoifinn Devitt: And I know there’s a lot of interest in the sustainable finance area at the, say, the operator level with among asset managers and a lot of hiring going on there. What level of interest are you seeing at the academic level? Like, are you seeing students wanting to specialize in this and wanting to add it to their sweet say of electives.
Fabiola Schneider: Yes, certainly there’s a big drive. Sustainable finance has come from niche to mainstream, especially ESG investing continued to soar in 2021. According to some estimates, one-third of assets contain sustainable investment these days. And while ESG doesn’t equal impact, I still see this growth as a very positive development. The conversation changed, the topic seems to slowly reach all spheres and stakeholders. And actually, as you mentioned, especially in younger generations, we see a big drive for this. The master’s that I did back then actually now has been restructured and renamed to Renewable Energy and Environmental Finance to reflect upon change in interest of students. So that’s really positive. We also see a lot of climate finance masters popping up. So it’s really changing both from the demand side, but also in terms of industry demand, as in this is now a skill that will be needed in the future and companies request that. So on the one hand, it’s students that are passionate about this subject, but also the industry requesting it from their new hires. Another aspect, though, maybe a natural part of market development, that with this increase in quantity, there’s a slight decrease in quality. I would say we’re unfortunately in the pandemic of greenwashing now. So the next step after this incredibly fast-paced growth of the topic is for the market to mature and to differentiate between true sustainability or true change towards green and the much easier and much more common lip service that we are seeing now.
Aoifinn Devitt: That’s so interesting. And speaking of lip service, it’s a good segue to start talking about some of your research. And you’ve got a lot to cover here. So let’s kick off. First of all, the work you’re doing on greenwashing. Greenwashing seems to have made its way into the kind of the common language now. Everybody thinks they know what it is, probably not always aware when it’s being done to them. Can you talk a little bit about the work that Greenwatch does and how AI is applied to that area?
Fabiola Schneider: Absolutely. So distinguishing between truly green change and greenwashing is a key component of a sustainable transition. There’s plenty shapes of green. And unfortunately, we see all of them, but we see also a lot of greenwashing, because naturally, the latter is much easier for corporations than the former, which is evident in the current greenwashing pandemic. There’s plenty of incentives to be perceived or to portray yourself as green. There’s increased consumer demand, better hiring processes, better access to finance, and so on. But there’s usually a cost and effort attached to really driving change and changing your current system. There’s multiple sides you can look at this. For example, the EU did a check of websites against consumer law to identify greenwashing, and they found that half of green claims lack evidence. It’s quite shocking. We at Greenwatch did take a different perspective. We look at it from the investor perspective. So we’re looking at corporate greenwashing from entities rather than the consumer product level. Still, our findings mirror what has been published. Greenwashing really is pervasive through all industries. So we looked at corporations from all industries and we find similar results. At Greenwatch, we envision a world where investors and actually all other stakeholders can assess the authenticity of green claims quickly, efficiently, and consistently. So in today’s world, AI is great for classification problems already, such as the one we address at Greenwatch, where we identify claims and classify them. In AI, you always have a key decision to make. You can either lean towards false positives or false negatives. The former, so towards false positive, means you might miss some, but you can also have too many. So that’s always the trade-off that you have to make. At Greenwatch, we decided to lean towards having too many positives, as in false positives. That’s why we have a human in the loop who then verifies our positives. But if we did the opposite, that would mean we might miss some of the positive classifications, which means some greenwashing would get away, which we want to avoid. AI in this sense is key to support us though, because the sheer amount of data that is out there these days is too big to be reviewed by individual humans. We live in the digital age, there’s new information 24/7, and especially When you look at advertisements, it’s too much for a single human or even a team of humans to assess. People say data is the new oil. I think we’d rather run the risk of drowning in data, which adds a nice twist to the oil analogy.
Aoifinn Devitt: That’s so interesting. Do you think our starting point has to be skepticism? So whenever we have a green claim, should we be suspicious and sort of wait for the evidence first? Do you think that that will create maybe frictions and kind of barriers to trust, or do you think that’s an important part of ensuring that these claims mean something?
Fabiola Schneider: I think critical thinking should be the basis for any judgment we make. We try to teach that to students as well. In today’s world, it can be fairly easy to revisit some information and to confirm. So it’s good life advice to always look with a critical mind. At the same time, of course, we do need trust. That’s what community and society runs on. That being said, the financial industry isn’t exactly at a high point of trust to begin with. So when there’s been claims made in the financial sector, as we analyze in Greenwatch for the investors, I think critical thinking definitely is good advice.
Aoifinn Devitt: And in terms of the scale of the problem, I mean, certainly there has been a proliferation of green products or products with ESG in the name or SDG in the name. Equally, there’s a lot of pressure on companies to make change and be seen to make change. Equally around net zero, there’s a lot of, I suppose, a lack of understanding as to how we get to that path and what it means exactly. Do you see that the problem of greenwashing is increasing? Has it got worse over time? Is it continuing to get worse?
Fabiola Schneider: Certainly, that’s because the interest in green has increased so much. That’s what I mentioned earlier. It’s a tandem. While the market is increasing and the interest is increasing, so is the amount of greenwashing increasing. And that’s because so far no one is holding anyone accountable, neither the firms nor the investors. And that’s where Greenwatch comes into place. And we try to provide that to the market and really hold people and firms accountable to their statements and their claims. Of course, we’re not the only ones responsible for that. There’s legislation coming into place. Really, the first step is to define what green really is, because in order to detect greenwashing, that’s the first step. This is green and this is not.
Aoifinn Devitt: And actually, on the concept of definitions, that’s a good segue to your work in taxonomy. Can you talk about what you’re doing there in terms of your work in taxonomy and whether you believe that the current taxonomy is fit for purpose.
Fabiola Schneider: It’s very much a hot topic at the moment, precisely for this pandemic of greenwashing that we’re seeing, and it’s supposed to be a first tool to address it. It closely links to our work at Greenwatch, therefore, because it will enable anyone to detect greenwashing as it gives a very clear definition of what green actually is. Let me give you a bit of background maybe first. So the taxonomy is part of the EU’s action plan on financing sustainable growth. It’s meant to be a reporting enabler and a transition tool that provides clarity on what constitutes an environmentally sustainable activity. Here’s the first big catch: it’s at activity level, not entity level. More so, it’s important to stress that the taxonomy covers 6 environmental objectives, and they’re all equally weighted. Climate change mitigation and climate change adaptation are 2 of them, but there’s also circular economy, pollution prevention, water and marine resources, and biodiversity. For the first two criteria on climate change, the technical screening criteria have already been published and the first so-called delegate act has been adopted by the European Commission. Maybe let me elaborate a bit on the process. So the European Commission set the overarching ambition that’s called the taxonomy regulation and it’s formally law. Formally, then afterwards there’s the subsequent delegate acts which specify criteria and are a bit more detailed. Those delegate acts get voted on by the Member State Council and the European Parliament. The taxonomy regulation calls for a science-based approach, and that’s why there’s the Platform on Sustainable Finance by IServicerpa. It’s an expert panel specifically appointed to advise the European Commission on this taxonomy. Most recently, a complementary delegated act has been published, which additionally outlines criteria for the inclusion of nuclear and gas as so-called transitional activities. It’s much more a product of political power than scientific backing, which is also obvious in the process. The Platform on Sustainable Finance, so the expert scientific gremium created to give evidence-based recommendations, has been sidelined on this and only got very little time to comment on the final draft when it was already written. Our response to this, our official feedback, was published on Monday, and it outlines why the proposed criteria are absolutely not fit for purpose. The taxonomy is a hugely ambitious project that could have a tremendous impact in directing capital where it’s needed to get us to net zero.. And while the first delegated act is decently suitable to fulfill this ambition, the newly added complementary delegated act stands in great contrast to the overarching purpose of the tool. It’s not fit for 55, it’s not according to the Green Deal ambition, and it will hamper our progress towards reaching the Paris ambition. I really hope the European Commission reflects on our feedback and reconsiders, or if it goes through, that either the Member State Council or the European Parliament find a majority vote to vote down this greenwash proposal.
Aoifinn Devitt: It’s interesting that you mentioned the lobbying aspect and perhaps the fact that some of this was the outcome of lobbying. Based in the US where I am, I think certainly many of these issues have taken on a political mantle, and that is unfortunate because it muddies the waters, of course. So just around the— I’ll say first on the political side, were you encouraged by some of the bilateral or multilateral communications that came out of COP26? And did you see that there is— we’re moving in the right direction, at least in terms of momentum and action?
Fabiola Schneider: Sure, I would always advocate multilateral communication and collaboration. But what struck me most with COP26 was that despite being announced as the most inclusive summit on record, about two-thirds of civil society organizations who usually would send delegates to COP have not traveled to Glasgow for multiple reasons. Vaccine apartheid, changing travel rules, incredibly high travel costs, and also Britain’s complex immigration system. So actually, I think COVID, this crisis, really gave a good outlook at what happens once the world gets a feeling of emergency. It seems it only made the gap between rich and poor or powerful and powerless more visible. So for me, it was positive that at least at COP, despite this obvious non-inclusion of people, it was announced that £165 million will be made available to tackle climate while change but simultaneously addressing the inequalities that make women and girls more vulnerable to climate change. So, to empower them to take climate action, that was very promising. In terms of diversity, the UN stressed how utterly needed this is, because globally women are more vulnerable to the effects of climate change than men. That’s in part because they just constitute a larger majority of the world’s poor, but also because they often depend on small-scale farming for their livelihoods and that’s particularly vulnerable to climate change. According to some reports, women and children actually comprise 80% of those displaced by climate-related disasters.
Aoifinn Devitt: It’s so interesting, as I mentioned at the intro, that you are quite interested in diversity and inclusion topics. And here already we can see just how intertwined all of these topics are.
Fabiola Schneider: I really think they need to be looked at in tandem. Yes.
Aoifinn Devitt: Yeah, exactly. One of the items you mentioned before is around net-zero targets. And certainly we’ve seen everyone from underlying institutional investors to corporations adopt net-zero targets. Can you talk a little bit about that in terms of, are we all speaking the same language regarding that? Do you expect that these targets will be achievable? And are we going about it in the right way?
Fabiola Schneider: That’s some very loaded questions. Generally, yes, we do need net-zero targets. It is a step in the right direction. But the devil really is in the detail. And making great promises for around 2050 isn’t a substitute for concrete and decisive action now. So first, I’d like to emphasize that the shape of the trajectory really matters. Are we talking about a linear decline, the 7% year-on-year reduction to global net zero in 2050 based on IPCC data and the UN Emissions Gap Report? The shape of the curve really determines the cumulative emissions over time, and that’s what really matters. We cannot do all front-loading emissions and then a sharp drop to zero after 2045, at worst based on some technological innovation that’s not yet existent. This bathtub analogy is often used to explain emissions. So in order for the bathtub to not overflow, you need to fully close the faucet, right? 100%. We don’t need 80% reductions or 90% reductions. We need to stop adding greenhouse gases to the atmosphere. We need to stop adding water to our bathtub. So net-zero 2050 means we shut the faucet in 2050. Yet it still matters how much water is flowing before. It’s very different whether you slowly reduce the inflow and then fully close in 2050 Maybe some water will spill on the floor, sure, but we managed to avoid most severe consequences. You can also go full power, full flow until last minute and then close it. But our imaginary bathtub is already nearly full now in 2022. We’re approaching several critical tipping points. If we go full speed until 2050, not only is our bathtub gonna overflow, we’ll drown as the entire bathroom starts filling up, even if the faucet then is finally closed in 2050. So the first one really is the trajectory. The next point is this small word, net. That’s the whole debate on abatement versus offsets. It’s also a very important one. Small word, big implications. A lot of current net-zero plans rely heavily on offsetting emissions. While yes, there is and always will be hard-to-abate last emissions, this offsetting is really only for those last-mile emissions when you’ve tried everything else, not for example, for the energy sector where we today have plenty of viable alternatives to burning fossil fuels. I read headlines like, “World’s first certified carbon neutrally produced oil sold,” and I have to do a double take. Bloomberg did a nice piece titled, “The Fictitious World of Carbon-Neutral Fossil Fuels: How to Sell Carbon-Neutral Fossil Fuel That Doesn’t Exist.” In that piece, they quote that carbon-neutral gas shipments come at less than $6 per ton of carbon dioxide equivalents. Clearly, voluntary markets at the moment are not working. We are in a decade where abatement has absolute priority over offsetting. Only last emissions that cannot be reduced otherwise should be offset using regulated markets with fixed decreased carbon budgets. And then there’s the whole issue of avoided emissions, carbon credit instruments where a high emitter takes credit for helping someone else avoid a future emission. Imagine you are on a diet and you just tell someone else to eat less. Also, it’s often just accounting tricks and impossible to credibly verify how much future emissions you saved. Overall, proponents of offsets postulate that all carbon is equal, but that omits that the cost of avoiding carbon isn’t equal. The rich are benefiting from the carbon space of the poor. So justice is the third thing that I really would like to stress here. Net zero 2050, sure, that’s a global average, but the developed world really needs to hit net zero earlier, developing world later. So big corporations now making big pledges should really target earlier than 2050. My last point is then on the scope of emissions that also matters in the pledge. The greenhouse gas protocol defines 3 types of emissions. The first, Scope 1, is direct emissions. So that’s actually burning fossil fuels and you can see it coming from a chimney. The second is energy consumed, so emissions from, for example, your electricity. And then lastly, Scope 3, that’s your supply chain emissions, value chain emissions. It goes both ways. Upstream and downstream. My research usually looks at the fossil fuel sector, and there you have the so-called Scope 3 use-of-product emissions, and they, according to Carbon Tracker, account for up to 90% of emissions. That’s because ultimately, when you burn fossil fuels, the product of an oil company, you will always emit greenhouse gases. So addressing this inherently unsustainable business model is key for the transition of any fossil fuel company. Which is why Scope 3 use-of-product emissions need to be included in any credible net-zero pledge. With regards to oil and gas firms, it’s probably also important to stress that pledges need to target absolute, not relative emissions. So not intensities, but actual emission reductions, absolute emission reductions. Maybe that’s a good final concluding comment. We do need absolute sustainability, not relative sustainability. To come back to the example of a diet, there’s no point claiming you did well because in your group everyone gained 10 kilograms, but you only gained 5. So while net zero targets are important, it is even more important to credibly outline the path on how to reach them and be transparent about one’s transition plan.
Aoifinn Devitt: Well, you’ve expressed that extremely clearly, and I think some very helpful analogies there. I particularly like the bathtub analogy because as you were describing a bath filling, I’m thinking of the plug hole being open perhaps, or a crack in the bath. I mean, there are clearly some ways of defraying that water buildup. And just before we discuss divestment and engagement, I wanted to ask you about the offsets today. And you mentioned that it isn’t enough to simply offset, but there are, say, carbon sinks or, you know, reforestation was a pledge from COP26. What kind of offsets do you see as being the most scalable and effective?
Fabiola Schneider: Again, to stress that offsetting should never be in lieu of abating. It should be independent of it. And we should focus on retaining the ones that we already have and not offsetting The natural carbon sinks that we have, the oceans, take up most of the carbon that is being produced. And again, we have those critical tipping points where we can have a huge amount of greenhouse gases being released. I think the largest direct carbon capture offsetting scheme just got in place and it can only capture the emissions of about 800 cars. So really to believe in offsets as a way out of our crisis is just not credible. So I would always look at forestation projects more from a different angle, not in terms of offsetting emissions, but always to retain biodiversity and all the big advantages that these projects have, and never as a strategy to reduce our greenhouse gas emissions.
Aoifinn Devitt: That’s very clear. So just now moving to another hot topic, which is engagement versus divestment. And certainly, there seems to be more now being said about active engagement and how being essentially inside the tent perhaps one can affect more change than being outside the tent and divesting. How do you see the current debate and what do you see as being most effective?
Fabiola Schneider: Yeah, so together with my supervisor, Professor Andreas Hörbner, I’m actually working on a conceptual paper where we advocate for engaging inequities and denying that. So in the divestment versus engagement debate, often dubbed voice versus exit, it’s important to differentiate between asset classes, especially with regards to the market where they are mainly active. Let’s start with divestment in equities. So equities are predominantly active on secondary markets, meaning if I divest, I sell it to somebody else. While that can be a strong political symbol and through share prices may impact acquisition strategies and so on, it has no direct impact on corporate cash flow. Money that is already in the firm, already in the market, changes hands on the secondary market. With fixed income, that’s different. Naturally, debt has a predetermined maturity usually, when it needs to be repaid, it comes due. Yet most companies don’t repay that debt given cash constraints and leverage strategies, they refinance. So debt, in contrast to equities, goes through refinancing cycles and keeps hitting the primary markets, fresh issuance. This also means that investors routinely face the decision to roll over debt and to thereby provide fresh cash to the company. And what we try to communicate is the big opportunity this poses. Because in the time before debt is due and must be repaid or refinanced, let’s say the 100 days before that, that’s really the key moment to influence for any investor that wants to drive impact. Here, investors have a lot of negotiation power because the company needs that fresh cash. But now the next question: so how could a bond investor engage? How could he make demands? Well, that’s easy. She can demand covenants. Financial covenants have been routinely agreed, so firms are familiar with the concept on both sides. Now, instead of financial metrics, the debt can be linked to sustainability KPIs, for example, greenhouse gas reductions. In order for a bond to be Paris-aligned, the company would need to reduce their emissions by at least 7% year on year, as mandated in, for example, the EU’s Paris-aligned benchmark and also called for in the UN Emissions Gap Report. If the company fails to do so, the debt gets more expensive. To my great delight, I actually recently saw on Bloomberg that sustainability-linked loans and bonds were the fastest-growing scenes in the ESG fixed income market in 2021. While of course those exact targets will need to be scrutinized with regards to their level of ambition and potentially greenwashing, linking back to what we just talked about for net zero, I’m very pleased with this development and I hope that investors wake up to the big power they have there.
Aoifinn Devitt: That’s so interesting. I feel like a child in a candy store right now. There’s so many topics that you have knowledge on that I really try to choose which one to ask you about next. But I suppose just in terms of what you’re working on, clearly now is cutting edge. My last question about your research topics is, if you were to look forward to the next 5 years, is there any one area, say, of technology or advancement that you think is going to be— it really excites you today and you think is going to grab our attention in the years ahead?
Fabiola Schneider: Maybe within my field of finance, I really enjoy taking the human factor into account. So for example, topics that fall under behavioral finance and at the intersection to other social sciences and anthropology, for example.. It can really offer a refreshing perspective personally after mainly working on gigantic spreadsheets or even worse policy text. Something I came across recently is, take for example standard economic theory where classical stability analysis suggests that the population will only change its behavior if 51%, so the majority of the group initiates change. But now studies carried out by psychologists actually find that minorities as of 25% can drive change. This translates to activist groups at 25% would be able to change the social norms in their communities. I think we tend to underestimate the power that a few dedicated people can have to shake up well-modeled systems. I’ve personally met some of the Fridays for Future activists, and I was very impressed with the level of commitment that young people show for a cause so early in their lives. That really has me optimistic for the future.
Aoifinn Devitt: It’s so interesting because when you throw in social media to that, as well as perhaps the turmoil in our lives that COVID wrought, and how that has perhaps made us more resilient, more adaptable. And then I think around the behavior, and I spoke about this with Joel Morland, around people’s feeling about doing good, whether they feel that that should involve an element of sacrifice or whether there can be a belief that doing good is the double bottom line makes sense. So I think there’s probably a lot more work to do on that, but we are going to hear a lot more about it.
Fabiola Schneider: Absolutely.
Aoifinn Devitt: Let’s just have a few closing questions going back to some personal reflections. So throughout your career so far, it’s very much mid-career and there’s a huge amount that we’ve covered. Have there been any key people who’ve really motivated you or even, you know, just in life in general?
Fabiola Schneider: So for my career, that’s very obvious and clear. We have my supervisor, Professor Andreas Höppner, and also Theodore Kojiyano, who was a postdoc back when I met him at UCD. They showed me a very different side of academia, one that’s very tangible and actionable, and their relentless energy when facing the often frustrating battles in sustainability is really inspirational. But since you’re asking about my personal story, I must say I really hope I took away some learnings from the way my mom raised me, or us. A single parent and a part-time nurse, she always puts us kids first, spending her limited financial resources on our hobbies and buying organic food because she believes that’s just the right thing to do. She always cared for problems in the world. Of course, as a spiteful teenager, you’re immune to advice, but looking back, I think it profoundly shaped my values and my drive for sustainability today.
Aoifinn Devitt: And speaking of your values and your drive for sustainability, is there any particular creed or motto that you live by?
Fabiola Schneider: In fairness, you gave me a heads up on this question, and I checked a few of the other very interesting podcasts that you already published. So I did have time to reflect on this. I thought about quoting Oscar Wilde, which seems like a great fit, both with your Irish background and the topic of diversity. I really enjoy just reading him over and over again, increasingly the older I get. Yet any statements I picked just seemed pretentious in the end. So I think I’ll just go for a simple, be kind. Besides the fact that a lot of the world problems I think could be solved by a little bit more kindness, I’ve certainly also found for myself that it delivers much more happiness to meet anything or anyone, including myself, with kindness.
Aoifinn Devitt: Well, that’s a wonderful way to end our conversation. Because you really do embody the integration of academic work with our daily lives and with the lives we lead professionally. And that is done very rarely, unfortunately. Academic research is not translated into workable plain English, and then I think a lot of it gets lost and is not usable. So what you’ve done here is translate a wide range of highly technical topics into very relatable and understandable and digestible components. So thank you so much for that and for sharing your insights with us.
Fabiola Schneider: That’s a great compliment. Thank you. I hope your listeners find this insightful and feel free to reach out if you have any questions.
Aoifinn Devitt: Absolutely. Well, we’ll put some links in the show notes. I’m Aoifinn Devitt. Thank you for listening to the 50 Faces Podcast. If you liked what you heard and would like to tune in to hear more inspiring investors on their personal journeys, please subscribe on Apple Podcasts or wherever you get your podcasts. This podcast is for informational purposes only and should not be construed as investment advice, and all views are personal and should not be attributed to the organizations and affiliations of the host or any guest.
