Dirk Schoenmaker: Being unsustainable is too cheap

June 5, 2025

^{This article was originally written in Dutch. This is an English translation.}

Dirk Schoenmaker, Professor of Finance at Rotterdam School of Management, conducted research into green monetary policy, thereby influencing ECB policy. He has a mission: to encourage investors to make a fundamental shift from focusing on short-term profits to long-term value.

By Harry Geels

You are ranked fourth in the 2023 Economists' Parade of most innovative economists. How do you explain this high position?

'If you do a lot of research outside the box, this can lead to a high ranking in the ESB innovation ranking. And by that I mean truly innovative research, not just adapting existing models. In this case, I suspect that my research into green monetary policy contributed to the high ranking. Initially, this research was off limits. Monetary policy was supposed to be primarily about inflation and not burdened with secondary objectives. Five years ago, sustainability was not yet part of the ECB's mandate. But a lot can change in a short time.

Thanks to the results of my research, the ECB has changed its policy on quantitative easing (QE). I made it clear that if the ECB pursues a “neutral” monetary policy, it will also buy bonds from CO2-intensive companies, relatively large amounts in fact, because they are capital-intensive, unlike companies in the service sector, which issue almost no bonds. From a sustainability perspective, neutral policy is therefore not neutral at all. When buying bonds, the weighting of CO2-intensive companies must be reduced, which is now happening. Mind you, this is not just about the risks of CO2-intensive companies, which the ECB is now increasingly pointing out in relation to investments and financing. This is an allocation argument. Risk is actually the “cowardly” argument. We must also dare to allocate to the “good” companies. Incidentally, there is no longer any QE, but even when the ECB takes bond portfolios as collateral, the carbon footprint is now taken into account.

From a sustainability perspective, neutral monetary policy is not neutral at all.

You have written a number of bestsellers, including Principles of Sustainable Finance, Financial Markets and Institutions: A European Perspective, Governance of International Banking: The Financial Trilemma, and Corporate Finance for Long-term Value. What makes your books on sustainable finance so special?

In these books, my co-researcher and co-author Professor Willem Schramade and I provide an integrated valuation of companies by deducting the social and environmental value (if negative) or adding it (if positive) to the financial value using the discounted cash flow (DCF) method. This allows us to calculate exactly what a tonne of CO2 emissions costs and then convert this into a series of cash values. The social factor can also be calculated in a similar way and converted into cash. We did this as part of our research into the AEX Futureproof Index. Philips scores highly in this index, for example, because its medical equipment prolongs life, and life years can also be assigned prices using welfare theory. This enables us to calculate prices for all social and ecological factors. Randstad also scores highly because of the jobs it provides, and KPN because of its social communication component.

These studies have probably also contributed to the ESB classification discussed earlier. The question is, of course, whether this new valuation method will actually lead to different investment behaviour. That may be asking too much at this stage. However, we are hopeful. The method is completely transparent and evidence-based. We have two main target groups in mind: the companies themselves, and in particular their management and supervisory boards, which will gain clearer insights into where things are going well and where there is room for improvement, and fundamental investors, probably mainly institutional investors in the first instance. As mentioned, an index has recently been launched. History shows that a track record is needed for it to become the standard. It will also help if we include more companies in the index, for example a European Futureproof Index. Real insight will come when we can compare the “winners” and “losers” within each sector. Finally, we have also developed a new fundamental ratio to improve on the old “price-to-book” ratio, namely the “Futureproof Ratio”, which divides the integral value by the financial value, resulting in a ratio that provides additional information compared to the “old” ratios.

What are the main findings in your book “Financial Markets and Institutions”?

'It's a classic, with a European perspective. This was necessary because most finance books are American and start with the Federal Reserve, for example. The idea of my co-author Jacob de Haan and myself was to write a standard work that starts with the ECB and then describes the European financial markets. Incidentally, we are lagging far behind the US in terms of data. We still have a long way to go in that respect.

One of the things that stands out is that stock markets play a much more important role in corporate financing in the US. In Europe, bank financing dominates, albeit with a declining role. Another major difference is that the American market is a market, while Europe is much more fragmented. But steps are being taken here too. We now have a number of large European stock exchanges and steps have been taken at EU level towards a capital union. European banks are still a special case. They often remain within local banking oligopolies, supported by politicians who, since the credit crisis, have little appetite for international bank mergers. Every European bank is still subject to local supervision, in addition to Europe-wide supervision by the ECB, some of which are stricter than others. We apparently still see banks as national icons, just like our airlines.

The term “financial trilemma” is also intriguing. What does it mean?

'Trilemma is indeed an intriguing term: three factors that cannot all apply at the same time. If you have fixed exchange rates, you cannot pursue your own monetary policy. That is the monetary trilemma. If we want a European banking union, there must also be central, rather than local, supervision and an overarching deposit guarantee scheme, an idea that I developed before the credit crisis and presented at a conference in Frankfurt. Various ECB officials have subsequently referred to the financial trilemma as the basis for the banking union in various statements.

Incidentally, the European banking system is not in such bad shape. Look at the US, where there was another banking crisis in 2023. Local politicians must dare to take the final steps. The same discussion applies to Eurobonds, by the way. The sad thing is that we apparently need crises to be able to take new steps and that we cannot move forward with a substantive discussion in good times. But I never give up hope. One of my mentors, Charles Goodhart, once said: “Never underestimate the power of a good idea.” Often, good communication is lacking at the outset, but a good idea usually finds its way, and I have the same hope for the completion of the banking union or the Futureproof Index. I'm going for it!

If we want a European banking union, there must also be centralised, rather than local, supervision.

Where does your enthusiasm for sustainability come from and how do you view it in the current polarised debate? What are the bottlenecks and how can they be resolved with the lessons learned from sustainable financing?

My latest book is called, consciously or unconsciously, “Corporate Finance for Long-term Value”. The term sustainability has indeed become polarised, even worn out. If the focus shifts to long-term value creation, everyone knows that sustainability and, for example, the risks of climate change must be taken into account. The problem with climate change is the current focus on the short term. Politicians want to be re-elected. Company directors are judged on their profits every quarter. But if we shift the anchor, i.e. long-term value creation, further into the future, we can avoid getting caught up in the issues of the day.

Incidentally, enthusiasm for preserving the planet arises naturally when you delve into research on the “planetary boundaries”. Six of the nine boundaries have now been exceeded, and the living environment in most parts of the world will not improve in the coming decades. An open, inquiring and interdisciplinary mindset has helped me in this regard. It is also important to always put the common good above individual interests, something I learned when I was working at the Ministry of Finance. In that sense, I am still half a policymaker, in addition to being a scientist.

What are your other ambitions, as a scientist and as a person?

I am still as happy as a child when we develop a new scientific model or a new perspective that provides new insights and actually catches on in society. To achieve the latter, I seek support in communication, because that is also a profession in its own right. Sustainability is an important theme in this regard. Climate is not a left-wing or right-wing issue; it affects us all, both current and future generations.

The paradigm shift is starting in the financial sector, because that is where decisions are made about what gets financed and what doesn't.

Another challenge is that in the financial world, 90% of people still think in a neo-classical way, i.e. in line with the “shareholder value” concept. By unilaterally striving for the highest returns, we are, no matter how you look at it, exploiting other stakeholders, including the planet. A paradigm shift is needed, and it is likely to start in the financial sector, because that is where decisions are made about what gets financed and what doesn't. Of course, there are visions of populist movements around the world. But it starts with ourselves and, more broadly, with the financial world here. I hope that the Futureproof Index, which is likely to soon have a European and American counterpart, can contribute to this. In addition, “true pricing” must play a more important role. Sustainability is not more expensive. Non-sustainability is too cheap.