The time is ripe for sustainable investments
Sustainable finance products as a growth strategy? A broad-based expert report identifies considerable potential in this area and proposes measures to help make financial market actors more customer-oriented and environmentally-friendly.
By Yvonne von Hunnius/Loa Buchli, 3.08.2016
“The interest in sustainable investments is there. It just has to be exploited,” says Sabine Döbeli, CEO of Swiss Sustainable Finance (SSF), a platform involving over 90 representatives of the financial sector. She firmly believes that sustainable finance is crucial for Switzerland as one of the world’s most important financial centres. Ms Döbeli is also one of the co-authors of a report entitled “Proposals for a Roadmap towards a Sustainable Financial system in Switzerland”, which was published in mid-June 2016, presents measures for greater sustainability in the Swiss financial market and is the product of a broad and fruitful dialogue. It was compiled under the auspices of the Federal Office for the Environment (FOEN) and involved the participation of over 30 experts from the private sector, federal authorities, universities and nongovernmental organisations (UBS, CS, Swiss Re, Robeco SAM, Zurich Insurance Group, Globalance Bank and other private sector actors. The WWF was one of the nongovernmental organisations involved).
The report expresses the conviction that sustainable investments can act as robust drivers of growth in the financial market. Although sustainable investments still only account for a small percentage of investments, they represent a strong growth market. According to the market report “Nachhaltige Geldanlagen 2016”, an increase of 169 percent on 2014 was recorded at the end of 2015. In addition to newly recorded categories, an increase of almost 100 percent was recorded in the existing categories. See FNG, Swiss Sustainable Finance (2016).
Strong client demand
The topic of sustainability is ready to enter the mainstream. The aim is to make the application of the ESG criteria a requirement here: ESG stands for “environment, social, governance”, in other words the consideration of environmental and social issues as well as questions relating to company management by companies and analysts. The authors of the report formulated 20 concrete proposals for the integration of ESG criteria by financial market representatives into their processes. The measures relate to the areas of the financial system that offer the greatest leverage in terms of sustainability: asset and wealth management, institutional investors, credit business, capital markets, and research and education.
The experts are hopeful that added-value can be created for Switzerland in the area of private banking in particular. As the global centre for private banking, this represents an opportunity for Switzerland to ensure the greater integration of sustainability into the services provided in this sector. The report refers to surveys which show that private banking clients want two things: to earn money and have a positive impact through their investments. Hence advisors can respond better to the clients’ wishes, if they can offer them sustainable products. The experts also see potential in the area of asset management. If Switzerland would like to be more competitive in this area, it should make better use of its knowledge about sustainable investments in the area of standard asset management practices. In general, increasing numbers of institutional customers like pension funds, insurance companies and foundations value the incorporation of ESG criteria into their asset management.
Systematic approach to sustainability
The experts all agree that a lack of awareness-raising, commitment and expertise among financial market actors and insufficient transparency are the greatest obstacles facing sustainable investments. For this reason, the formulated measures start first and foremost with transparency; they provide support to client advisors in raising the topic and demand that greater attention be paid to research and education in this area. The key points of the report are that client advisors should be given better internal training and should also receive a basic knowledge of sustainable investments during their education and training at the universities and institutes of higher education.
The proposed measures also examine the financial sector’s processes in detail. They aim to make sustainability a standard element of all consultations provided by the financial institutions, for example banks. The ESG criteria should also be automatically integrated into the process used in the selection of investment products by portfolio managers. The providers are invited to demonstrate the extent to which they integrate the ESG criteria for all of their financial products. It is also intended to evaluate ESG factors systematically in the credit business and to integrate them into the banks’ risk management systems and the banks’ and ratings agencies’ credit rating systems.
The idea behind these suggestions is a strong one: the more standard the application of the ESG criteria becomes, the more established they will become. This requires solid foundations, however. Hence, the report demands that tangible instruments be created or further developed: what is involved here, for example, is the integration of sustainability criteria into performance assessment and key performance indicators and into the optimisation of risk/return profiles.
Global dynamics generate a tailwind
Given that the debate surrounding sustainable finance was mainly confined to expert circles for a long time, the concrete way in which it is dealt with here may appear somewhat surprising. However, thanks to a new global dynamic, the actors have good reasons for pushing the topic of sustainabilty now. With the Sustainable Development Goals, international targets for sustainable development and a legally binding climate agreement for all states were adopted in Paris in 2015. The billions agreed on for the financing of these programmes have not yet been made available. Annual investments totalling between five and seven billion dollars will be needed to fulfil the targets for sustainable development alone. New forms of financing must be developed for this now.
Questions regarding sustainable development on financial markets are currently being discussed on many different levels. For example, the G20 forum of the 20 most important industrialised and newly industrialised countries has established a study group on green finance and also put the topic on the agenda of the G20 summit in September 2016 for the first time.
Switzerland can get things moving
Based on the study “UNEP Inquiry into the Design of a Sustainable Financial System”, which was carried out by the United Nations Environment Programme UNEP, the Swiss experts placed particular emphasis on financial market practice. The recommendations appeal to the individual responsibility of market participants. This focus on market solutions also distinguishes Switzerland from other countries. France and China recently made strong strides in this area too, but from a state perspective. In the view of the authors, the process adopted in their report is better suited to Switzerland which has a different style to many countries where change is more frequently instigated through legislation. The Federal Council adopted its principles for a coherent national and international policy in this area in February. The central principle is that the Swiss state sees its role in this area primarily as that of an intermediary: market solutions take priority.
This approach should have better prospects of success in Switzerland than anywhere else. The financial actors here have a considerable store of knowledge and experience in the area of sustainable investments. The Dow Jones Sustainability Indices, the first sustainable global family of indices, originated in Switzerland in 1999. Oekosar, the first ecoefficiency fund, which was launched by the private bank Sarasin in Basel, also triggered a shift in perspective from a thematic approach to an intersectoral one. The Swiss company RepRisk has developed to enjoy huge success on the global market with its ESG Risk Platform, through which RepRisk makes the EST risk profiles of over 65,000 companies available to financial actors.
If this roadmap is pursued, the topic of sustainable finance has enormous potential for consolidating Switzerland’s reputation – an important factor in the context of its position as a haven of stability. It also represents an important opportunity at global level. Jean-Daniel Gerber, former Director of the State Secretariat for Economic Affairs (SECO) and now President of the SSF, sums up Switzerland’s situation as follows: “As a global centre for asset management, Switzerland can contribute to increasing the sustainability of financial systems throughout the world.”
Article first appeard on Die Volkwirtschaft, the 26.07.2016.