Climate change adds new impetus to sustainable investments. Many providers of financial services are launching products designed to satisfy environmental and social demands in addition to financial requirements. There is a want of binding standards.
This summer saw record temperatures and catastrophic flooding all over the world. Scientists warn that global warming will attain 3 degrees Celsius by the end of the century unless CO2 and greenhouse gas emissions are immediately and drastically reduced. The Paris Climate Agreement set the goal of containing global warming to 1.5 degrees Celsius. Governments are devising strategies and setting implementation targets which will also apply to the financial industry.
Rapidly growing market for sustainable investments
These developments are influencing the investment behaviour of many investors and savers who now seek to invest their funds sustainably, in tune with environmental, social and governance criteria. The volume of sustainable investments has grown significantly in recent years. The data from Swiss Sustainable Finance (SSF) shows that investment volumes in Switzerland have increased tenfold, from around CHF 71 billion in 2014, to CHF 717 billion in 2018. Institutional investors account for approximately 90% of these volumes.
Clients increasingly look to sustainable investing
Rising demand, especially from institutional investors like pension funds and insurance companies, is the main driver of growth for sustainable capital investments. Most pension fund members expect their pension assets to be placed in climate-friendly investments, i.e. in alignment with the Paris climate goals. So do wealthy private customers; even the broad retail banking public now wants to invest sustainably. This was evidenced by a survey conducted by GFS-Zurich, a polling institution, on behalf of Greenpeace Switzerland.
Investors expect a minimum standard for sustainable investment
Many investors believe that investment products marketed as sustainable should satisfy minimum standards. Approximately one third of respondents are of the opinion that investment products marketed as sustainable must redistribute capital: in other words, such financial products should direct more money to more sustainable companies than to those that are less so. Greenpeace also demands that a minimum standard be applied to investment funds qualifying as sustainable. Regrettably, sustainable investment funds have not so far managed to direct more capital towards a sustainable economy than conventional funds, as is confirmed by a joint report by Greenpeace Switzerland and Greenpeace Luxembourg. Most of the surveyed products are not at all compatible with the Paris Climate Agreement, which Switzerland has ratified.
No uniform standards
Numerous financial institutions and pension funds are working on disclosing more sustainability-related information. However, as a KPMG study shows (), there is a lack of binding assessment and reporting standards. As a result, financial institutions are deciding for themselves how and to what extent to incorporate sustainability considerations in their business models. Comparing investments designated as sustainable is difficult. On the one hand, in certain sectors this leads to a dearth of trustworthy data to be relied upon for sustainable investment decision-making. And on the other hand, owing to the lack of standards, companies do not always disclose all the significant information needed by recipients and investors.
Pressure on providers likely to increase
The sensitivity of younger generations to sustainability issues is likely to add to the pressure on institutions. The disclosure of sustainability information – and its auditing by independent third parties – will probably become the market standard in the not-too-distant future.
