Sustainable finance to fight climate change
What are the benefits of sustainable investments? What encourages companies to go for sustainable investments? Is this a global movement?
Sabine Döbeli is the CEO of Swiss Sustainable Finance, an association that was founded in 2014 with the objective of promoting sustainability in Swiss finance. Prior to this, she was Head of Corporate Sustainability Management at Vontobel, and at Zürcher Kantonalbank she built up the sustainability research unit within the financial analysis department where she was involved in the launch of various sustainable investment products. We talked to Sabine Döbeli about the importance of sustainable finance today to fight climate change.
Hello Sabine Dobeli. You have worked in the field of sustainable finance for the past 20 years. What first interested you in this field?
When I finished my Masters in Environmental Sciences I actually never thought I would ever work in finance. But when offered a job in the field of environmental investments, I considered this an interesting option — and indeed I have stayed in this sector for my entire professional career so far. I think it’s fascinating that you can influence the economy by applying sustainability standards to your investments. The financial industry has an intermediary role, and therefore a lot of power to change the way we do business. To add to this, if you look at how sustainable investments have developed over the past 20 years, I think there has been a tremendous change, with both investors and banks having recognised their responsibility.
Can you tell us, as CEO of Swiss Sustainable Finance, the main missions of this institution?
Swiss Sustainable Finance (SSF) aims to promote Switzerland as a leading centre in sustainable finance and generally foster the adoption of sustainability principles within this industry. We provide information on this topic through publications, events and via media. We also help to develop educational and training material for our members. Furthermore we aim to stir growth in different segments by supporting our members and preparing practical tools for them. The idea of the founding members was to create a platform for exchange of information between different players such as banks, asset managers, service providers, institutional investors, universities, other associations and the public sector. Currently, with close to 100 members and partners, we managed to gain the most important Swiss financial players to support this idea.
I have the feeling that today’s financial system does not reward long-term thinking. But when we talk about sustainability, we’re talking about the future of the planet. So what makes sustainable finance possible?
Sustainability indeed has a lot to do with a long-term perspective. When assessing the sustainability of investments, criteria relate to environmental challenges, to the interactions with different stakeholders as well as to questions on good governance. All of these factors are based on a more long-term view. Reducing the environmental footprint of a company takes more than a year, improving customer loyalty needs a good product strategy and the creation of a customer-oriented culture. If analysts take such factors into account they by definition focus on a longer term.
But I agree that many mechanisms prevalent in the financial industry today, make it difficult to keep this long-term perspective. There are discussions around how to increase holding periods of shares, which have continuously decreased over the past decades. Also, it’s not easy for a company to plan for investments that only pay off after 3–5 years. So we definitely need clearer signals from long-term investors that are willing to reward long-term behaviour.
What are the rules of sustainable finance?
I wouldn’t talk of rules — there are many different options on how to integrate sustainability in financial decision making. What unites different forms of sustainable finance is that all of them integrate environmental, social and governance factors (ESG-factors) in a structured form into the investment decision. This can happen through utilizing sustainability ratings which assess the ESG performance of companies or other entities. The investor can concentrate investments in companies with a defined minimum rating. Another form is for investors to engage in active dialogue with an investee company with the objective of improving environmental standards such as their energy efficiency or governance practices. A more recent approach aims to optimise portfolios regarding carbon intensity in order to reduce financial risks.
In terms of global investments, how much does sustainable finance represent?
Globally, there are now USD 22.89 trillion of assets managed using responsible investment strategies, an increase of 25.2% since 2014. If we talk of responsible investments, this is quite a broad definition, including sustainable funds in a stricter sense, as well as funds applying just a few exclusion criteria (i.e. sin stocks). From 2014 to 2016, the fastest growing region was Japan, due to greater reporting and sustainable investing activity by institutional asset owners, followed by Australia, New Zealand and Canada.
Is this a global movement?
We can definitely talk of a global movement. In terms of assets, the largest three regions are Europe, the United States and Canada, respectively. Within Europe, France is the country with the highest volumes, followed by Germany, the UK and Switzerland.
In all the regions except Europe, where the definition of sustainable investing has recently become more stringent, the market share of sustainable investing has grown. In relative terms, responsible investment now stands at 26.3% of all professionally managed assets globally.
Globally as well as in Europe, which holds 52.6% of the global SRI assets, negative/exclusionary screening is the largest sustainable investment strategy (USD 15.02 trillion and USD 11.06 trillion, respectively.), followed by ESG integration (USD 10.37 trillion) and corporate engagement/shareholder action (USD 8.37 trillion).
What are the benefits of investing in sustainable companies and projects?
The most important benefit when investing sustainably is that your investment not only provides a financial return but at the same time contributes to supporting a sustainable economy. Furthermore, studies show that sustainable companies often have better employee retention, customer loyalty and face less accidents or lawsuits, all factors which can also result in a better financial performance. Generally, studies show, that the performance of sustainable investments is on average the same as that of regular investments, if not better, and beneficially often carry lower risks. Specifically, one can point out microfinance investments, which can be an interesting addition to a portfolio, changing the risk return profile for the better.
How is sustainable finance an opportunity for the banking sector?
Studies show that clients — especially wealthy ones — increasingly wish to use their investments to have a positive impact on the world. Banks should recognise this trend and strengthen their supply of sustainable products and services. This helps them to create more excitement with their clients, who see the positive effect of their investments as an exciting additional benefit. Such factors are especially relevant for the next generation of clients. Around USD 41 trillion will be passed on to the next generation of wealthy clients in the coming years, according to a study from the World Economic Forum (2013). Institutional investors such as pension funds and insurance companies also increasingly wish to integrate sustainability factors into their investments with the objective of reducing risks or identifying new investment opportunities.
Are there any known risks about the high degree of interest in sustainable investments or is this all positive for the future?
You mean in the form of a bubble? I don’t really see the risk of a bubble as sustainable investing is not primarily about investing into special themes. If you integrate such factors broadly into your investment decisions, you do not create a bubble. We currently see a lot of large institutional investors divesting from coal companies. This will most likely reduce the stock price of such companies over the long term. If someone believes that coal will still play an important role in the future energy mix, he will most likely make use of the lower prices and invest in these companies. In this sense, the integration of sustainability factors into investment decisions simply leads to new consensus estimates at the stock markets.
Is there anything you’d like to add?
I think that over the past years we’ve seen an impressive development in the field of sustainable finance. Large institutional asset owners globally — including sovereign wealth funds and large pension funds — have recognised the importance of topics such as climate change or severe violation of human rights for the long-term success of their investments. At the same time, organisations like the Financial Stability Board, the OECD [The Organisation for Economic Co-operation and Development] or the G20 have realised that integrating sustainability factors into financial decision making can help them achieve their overall targets: be it long-term economic growth, financial stability or the achievement of the Sustainable Development Goals. I find it encouraging that sustainable finance has left the niche and arrived in the mainstream.
Interview by Anne-Sophie Garrigou