Welcome back. If you’re in Tokyo tomorrow, make sure you don’t miss the first ever Moral Money Summit Japan. This Japanese-language event will be hosted by senior journalists from the FT and Nikkei at the Hilton Tokyo, and also livestreamed online. You can sign up here.
In today’s newsletter, FT EU correspondent Alice Hancock gives us the latest twist around the bloc’s green rules, with a wave of new requirements set to hit environmental, social and governance rating providers.
First, check out our interview with the young Austrian millionaire who is disrupting the debate around wealth inequality, philanthropy and tax.
BASF heiress Marlene Engelhorn: ‘The democratic solution is tax’
Many 30-year-olds would be quite pleased to find themselves €25mn ($26.9mn) better off. When Marlene Engelhorn came into this windfall in late 2022, courtesy of her late grandmother, her thoughts immediately turned to getting rid of it.
The solution she landed upon generated international headlines when she unveiled it last month. Unlike many other philanthropists, Austrian-born Engelhorn — whose ancestor Friedrich Engelhorn founded the chemicals group BASF in 1865 — doesn’t want to set up an eponymous foundation. She doesn’t even want to choose what is done with her inheritance. Instead, she is setting up a temporary council of Austrian residents to decide how the funds can best be deployed.
“I shouldn’t have had that position of power to begin with,” Engelhorn told me, referring to her financial clout. “I only have it because I was born into a rich family.”
Engelhorn’s story has captured public attention because, at a time of gaping wealth inequality in many economies, it highlights two urgent and intimately related debates.
The first of those is around tax. Engelhorn is among a growing but still relatively small number of wealthy people who have been publicly asking governments to sock them with higher tax bills. She’s a co-founder of Tax Me Now, a campaign group whose core message matches that of the Patriotic Millionaires, spearheaded in the US by the likes of Abigail Disney. Billionaires including Warren Buffett, George Soros and Michael Bloomberg have also argued that their own tax bills are too low.
One factor behind growing wealth inequality has been a reduction in the top marginal income tax rate: in the US, this has fallen from over 90 per cent in the 1950s to 37 per cent today.
But the richest people in the US technically receive remarkably little income, as this explosive report from ProPublica based on leaked tax records made clear. Instead, they have enjoyed huge gains in the value of their assets, which they can then use as collateral for bank loans to fund their lifestyles. The interest on those bank loans is tax deductible, enabling them to bring their effective tax rate close to zero.
The solution, Engelhorn argues, is to tax wealth. One way to do this is through inheritance tax — which was abolished in Austria in 2008, and which the UK government has also recently considered cutting.
Opponents of inheritance tax often say that it amounts to taxing money that has already been taxed. But this reasoning can be applied to almost any tax. I might just as well claim that I shouldn’t have to pay value added tax on a new bicycle because I’ve already paid tax on my income.
Beyond inheritance tax, Engelhorn argues for an annual wealth tax of 4 or 5 per cent on the largest fortunes — sufficient to make an impact on inequality and raise substantial public revenue, but far from high enough to wipe out smartly invested family fortunes.
While Engelhorn has plenty of well-heeled company in her calls for higher tax rates, her other key argument — around philanthropy — is less common among the wealthy. By lavishing huge sums on their favoured projects, she argues, rich philanthropists are compounding the power imbalance stemming from their wealth (an argument made in recent books including Anand Giridharadas’s Winners Take All, and Tim Schwab’s The Bill Gates Problem). Those concerned about this dynamic will have noted the campaign by hedge fund billionaire Bill Ackman to reshape the top management of Harvard University, to which he is a major donor.
In contrast, Engelhorn is eager to distance herself from the decision over what is done with her inheritance. She has established a small team to organise the new council, a process that has begun with invitation letters to 10,000 residents of Austria. Responses will be processed to form a council of 50 people, broadly reflecting the country’s demographic mix.
Members will gather over six weekends this year to decide what should be done with Engelhorn’s inheritance from her grandmother. Engelhorn — who will not be part of the council — will compensate them all for their time, using a separate pool of her personal funds.
Engelhorn declined to confirm her total net worth, saying only that the €25mn to be given away accounted for most of it. In any case, what makes this story interesting is not the extent of Engelhorn’s generosity, but her decision to give up control over how the money is used.
And while her council plan may have shaken up the conversation around charitable giving, Engelhorn reckons it’s futile to hope that wealthy people’s philanthropy can address the power imbalances stemming from economic inequality. “The real democratic solution is tax,” she said. (Simon Mundy)
EU agrees new ESG ratings rules to clean up the industry
The environmental, social and governance ratings industry has been under siege over the past year as regulators wake up to the vast influence that rating agencies wield over the direction of trillions of dollars needed for the green transition.
There is currently little oversight over how agencies come up with ratings or sustainability criteria against which stocks and bonds are deemed “green” enough to make it into the $2.4tn worth of sustainable funds, according to Morningstar figures.
Globally, legislators are working on ways to tighten up the industry but the EU has made an early move.
From mid-to-late 2025, EU ratings providers will have to be more transparent about their methods after lawmakers in Strasbourg agreed in a late-night deal on Monday night new rules that aim to make ESG ratings more reliable and rigorous. The rules also stipulate that agencies must be approved by the bloc’s financial regulator, the European Securities and Markets Authority.
If you are a rating agency from outside the bloc, you will need to have your ratings condoned by an EU-approved ESG ratings provider. Fees will be charged.
According to the European Commission, an unhealthy ESG ratings market means that investors can’t take account of possible sustainability-linked and other non-financial risks in their decisions. That means less money is going towards investments that will aid the green transition and best-in-class companies don’t automatically end up at the top of the potential investment heap as they should.
Mairead McGuinness, the bloc’s financial services commissioner, said that the agreement had been reached in under 30 minutes because lawmakers were keen to get the legislation over the line.
“This is a new area for EU regulation, in a burgeoning sector of the financial industry. The market and investors have been calling for more transparency so they can have confidence in ratings and this law will ensure that,” she said.
The law says agencies must publish their methodologies, data sources and the objectives of the ratings they provide, even if the ratings are only being used in their own marketing communications.
It does not mandate specifically what approach the agencies should take but does say that agencies must separate out E, S and G ratings and that environmental criteria must be explicit about whether they take into account alignment with the 2015 Paris accord.
Financial market players are exempted for the most part — a flashpoint in the negotiations — but this might not necessarily be a problem given that they are subject to transparency requirements and retail investors are rarely inclined to read through lengthy disclosure documents, said Vincent Vandeloise, senior research and advocacy officer at the NGO Finance Watch.
You have to think “what added value would it have to get those additional requirements”, he said. (Alice Hancock)
Smart read
As farmers’ protests put the EU’s climate agenda under strain, governments “need to find ways to hold firm to the overall goals while offsetting the impact on the most vulnerable groups”, writes the FT editorial board.
Read the full article here