Welcome back. If you’re in Tokyo tomorrow, make sure you don’t miss the first ever Moral Money Summit Japan. The Japanese-language event will be hosted by senior journalists from the FT and Nikkei at the Hilton Tokyo, and will also be streamed live online. You can Register here.
In today’s newsletter, FT EU correspondent Alice Hancock gives us the latest twist on the bloc’s green rules, with a wave of new requirements set to hit providers of environmental, social and governance ratings.
First, watch our interview with the young Austrian millionaire who is disrupting the debate on wealth inequality, philanthropy and taxes.
BASF heiress Marlene Engelhorn: ‘The democratic solution is tax’
Many thirty-year-olds would be very happy if they were 25 million euros better off. When Marlene Engelhorn came across this windfall at the end of 2022, thanks to her late grandmother, her thoughts immediately turned to getting rid of it.
The solution she stumbled upon made international headlines when she unveiled it last month. Unlike many other philanthropists, the Austrian-born Engelhorn – whose ancestor Friedrich Engelhorn founded the chemical company BASF in 1865 – does not want to set up a foundation of the same name. She doesn’t even want to choose what happens to her inheritance. Instead, she is setting up a temporary council of Austrian residents to decide how best to use the money.
“I shouldn’t have been in that position of power to begin with,” Engelhorn told me, referring to her financial power. “I only have it because I was born into a rich family.”
Engelhorn’s story has captured public attention because, at a time of yawning wealth inequality in many economies, it highlights two urgent and closely related debates.
The first of these concerns taxes. Engelhorn is among a growing but still relatively small number of wealthy people who have publicly asked governments to saddle them with higher tax bills. She is co-founder of Tax Me Now, a campaign group whose core message is similar to that of the Patriotic Millionaires, led in the US by Abigail Disney, among others. 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 is a reduction in the top marginal income tax rate: in the US this has fallen from over 90 percent in the 1950s to 37 percent today.
But the richest people in the US technically receive remarkably little income this explosive report from ProPublica based on leaked tax data made clear. Instead, they have made huge gains in the value of their assets, which they can then use as collateral for bank loans to finance their lifestyles. The interest on these bank loans is tax deductible, bringing their effective tax rate close to zero.
The solution, Engelhorn argues, is to tax wealth. One way to do this is through inheritance taxes, which were abolished in Austria in 2008 and which the UK government has also recently considered reducing.
Opponents of estate taxes often say it amounts to taxing money that has already been taxed. But this reasoning can be applied to almost any tax. I might as well argue that I don’t have to pay VAT on a new bike because I’ve already paid tax on my income.
In addition to inheritance taxes, Engelhorn calls for an annual wealth tax of 4 to 5 percent on the largest fortunes — enough to impact inequality and generate substantial government revenue, but far from high enough to wipe out shrewdly invested family fortunes.
While Engelhorn has plenty of good company in her calls for higher tax rates, her other main argument – around philanthropy – is less common among the wealthy. By spending vast sums of money on their pet projects, she argues, wealthy philanthropists exacerbate the power imbalance that arises from their wealth (an argument made in recent books, including those by Anand Giridharadas). Winners take alland Tim Schwab’s The Bill Gates problem). Those concerned about this dynamic will have taken note of hedge fund billionaire Bill Ackman’s campaign to reshape the top management of Harvard University, to which he is a major donor.
Engelhorn, on the other hand, would like to distance herself from the decision about what happens to her inheritance. She has put together a small team to organize the new council, a process that started with invitation letters to 10,000 Austrian residents. The responses will be processed to form a council of fifty people, broadly reflecting the country’s demographic mix.
Members will meet six weekends this year to decide what to do with Engelhorn’s inheritance from her grandmother. Engelhorn – who will not be part of the council – will compensate each of them for their time, using a separate pool of her personal resources.
Engelhorn declined to confirm her total net worth, saying only that the €25 million to give away made up the bulk of this. 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 about charitable giving, Engelhorn thinks it’s futile to hope that wealthy people’s philanthropy can address the power imbalances that arise from economic inequality. “The real democratic solution is taxes,” she said. (Simon Mundy)
The EU agrees new rules for ESG ratings to clean up the sector
The environmental, social and governance rating industry has come under fire in the past year, as regulators wake up to the enormous influence rating agencies exert over the billions of dollars needed for the green transition.
There is currently little oversight of how agencies come up with ratings or sustainability criteria based on which stocks and bonds are deemed ‘green’ enough to belong to the $2.4 trillion worth of sustainable funds, according to Morningstar figures.
Lawmakers worldwide are working on ways to strengthen the sector, but the EU has taken an early step.
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 evening on new rules aimed at making ESG ratings more reliable and stringent. 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 must have your ratings approved by an EU-approved ESG rating provider. You will be charged.
According to the European Commission, an unhealthy market for ESG ratings means that investors cannot take into account potential sustainability-related and other non-financial risks in their decisions. That means less money goes to investments that will support the green transition, and the best companies don’t automatically end up at the top of the potential investment pile as they should.
Mairead McGuinness, the bloc’s financial services commissioner, said the deal was reached in less than 30 minutes as lawmakers were keen to get the legislation over the line.
“This is a new area for EU regulation, in a fast-growing sector of the financial industry. The market and investors have called 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 reviews they provide, even if the reviews are used only in their own marketing communications.
It does not specifically prescribe the approach that agencies should take, but does say that agencies should distinguish between E, S and G ratings and that environmental criteria should be explicit about whether they take into account alignment with the agreement from Paris from 2015.
Financial market players are largely exempt – a sticking point in negotiations – but this is not necessarily a problem as they are subject to transparency requirements and retail investors are rarely inclined to read lengthy disclosure documents, said Vincent Vandeloise, senior research – and advocate at the NGO Finance Watch.
You have to ask yourself “what added value would it bring to have those additional requirements,” he said. (Alice Hancock)
As farmers’ protests put pressure on the EU’s climate agenda, governments must “find ways to stick to the overall targets while offsetting the impact on the most vulnerable groups,” the FT editors write.