Good Deeds – With Returns
Sustainable investments no longer exist in a niche - here's why.
Sustainable investments existed before in a niche, but not anymore. In recent years they have grown dynamically. Jean-Daniel Gerber, President of Swiss Sustainable Finance (SSF), and Yvonne Suter, Head of Sustainable Investments at Credit Suisse, discuss the reasons why.
Jean-Daniel Gerber: Almost 200 billion francs are now invested throughout Switzerland using sustainability criteria. I believe there are two reasons for this: Firstly, people still want to earn good returns, and secondly, they are increasingly concerned about what their investments are doing.
Yvonne Suter: We're seeing nothing less than a paradigm change among private clients in this sector, and interestingly enough among women especially. Sustainability is also a very big deal for the next generation. Young people want to know whether they can do something positive with their money. And a lot of businesspeople who are familiar with sustainability criteria from their own companies are looking for sustainable investment opportunities.
Almost 200 billion francs are now invested throughout Switzerland using sustainability criteria.
Gerber: People used to think the profits were less if you invested sustainably. Now several studies have shown this to be wrong. Sixty-three percent of all studies show that sustainable investments achieve equally good or even better returns than conventional ones. Thirty percent paint a mixed picture and only seven percent demonstrate lower returns. This situation is the result of a change of thinking among institutional investors, even if many of them still believe that sustainability is associated with high costs.
Suter: Identifying an investment as sustainable is not always easy. There are various ways of bringing sustainability to your investments. You can apply exclusion criteria, which means not investing at all in certain industries or sectors, or only doing so on certain conditions. Then you can assess a company's ESG criteria – environmental, social and governance aspects. In real terms this means analyzing businesses for their CO2 output, water consumption, working standards, child labor and management aspects. External, independent rating companies usually do this. And the cost may sometimes be considerable, but impact investments, with which investors pursue particular ecological or social objectives, are always very appealing because of their attractive returns, especially in a negative interest rate environment.
Gerber: But that's the case anyway, because despite the financial outlay which an ESG analysis involves, taking these factors into account usually has positive consequences.
Suter: Studies also show that businesses with strong corporate governance practices perform better in the long run and demonstrate more value. That is why they're attractive to investors. The focus used to be more on environmental aspects, whereas in recent years, social criteria and good governance – especially in terms of risk management – have become more important. And nowadays more and more people are taking the best-in-class approach by comparing different companies within an industry in terms of their ESG criteria and their social engagement…
Gerber: …and customers exercise their voting rights actively at general assemblies.
Suter: Precisely. That's why at Credit Suisse we advise our clients to combine these strategies when building up their portfolios, since every client has his or her own set of values. The challenge when advising clients is to identify those values. Only after talking with them in detail do we analyze a portfolio and put it together in compliance with the client's personal values and aims. Comprehensive analyses and internal tools allow us to reveal exactly what is being invested sustainably and what isn't. But values differ, not only from client to client but from market to market. Here in Europe there's a hot debate around genetic engineering and atomic power, whereas those themes are not relevant in the USA.
Gerber: That is why it's so difficult to lay down an international norm. Nevertheless, sustainable investments are basically evolving towards a general standard.
Suter: Global trends are driving this process, such as the Paris Agreement on climate change. There are already some countries that compel businesses to publish their CO2 output. In Switzerland we have a different approach, and a lot of it works voluntarily. As an example, Credit Suisse decided of its own accord to reduce the annual CO2 output on its real estate portfolio, which consists of 1,300 properties; on top of that, as a company we're already carbon-neutral. As an asset administrator and one of Switzerland's biggest real estate managers, we want to tap into the enormous potential that real estate has for climate protection. That's why we offer our clients the opportunity to invest in climate-neutral funds such as the European Climate Value Property Fund and our greenproperty real estate fund.
We want to tap into the enormous potential that real estate has for climate protection.
Gerber: A few months ago even the Swiss National Bank hit the headlines. The public wanted to know how it invests its assets, which amount to several hundred billion francs. The SNB adjusted its policy accordingly, not because legislators wanted it to, but because of public pressure. We’re seeing the same trend among pension funds. Policyholders want to know how they are investing the vast assets from which their pensions will be paid out.
Suter: On the institutional side it’s most likely that a standard will establish itself in conjunction with the SVVK, the Swiss Association for Responsible Investments.
Gerber: And this is where I believe the responsibility of the SSF lies. Because the issue is becoming increasingly important, Switzerland needs a consensus on what sustainability means. We already have 90 members – not only banks, but also insurers, asset managers, some pension funds, universities and Ethos, the Swiss Foundation for Sustainable Development. That’s a lot of different interests combined. What we have to do is raise companies’ awareness and educate their workforces.
Suter: This collaborative effort is also very important to Credit Suisse, which is why we ourselves are a member of the SSF. First off, we have access to many clients who are interested in the topic, and secondly we’re seeking dialogue so that we can continue to develop the sustainability sector in collaboration with asset managers and investors.
Gerber: People are discussing whether or not there should be a label for sustainability like there is in the German market. I myself don’t believe we need one.
Suter: There are certain standards already, such as the United Nations Global Compact which was concluded between businesses and the UN in an attempt to make globalization more socially and ecologically compatible. Credit Suisse signed the Compact and committed itself publically not to contravene international conventions.
Gerber: But not every company signed it. Credit Suisse has a profoundly leading role in the Swiss sustainability sector. But many other countries are already more advanced than Switzerland. The 200 billion francs which are invested here sustainably may sound like a lot, but that’s only three percent of everything that’s invested. We mustn’t forget that Switzerland is the world’s biggest asset manager.
Suter: But when it comes to sustainable investments, today’s market leaders are the Scandinavian countries, Holland, the United Kingdom and the USA.
Gerber: Still, the growth rate is remarkable here in Switzerland. In my view we’ve done a tremendous amount in recent years, but there is certainly a lot left to do.