Structuring financial flows sustainably
More and more people are looking for an environmentally and socially sustainable economy. The financial industry has a key role to play here. And the right framework conditions are accelerating the process.
Once again this year, topics that are directly or indirectly related to sustainable development are high on the list of concerns on the Credit Suisse Worry Barometer. From retirement provision to environmental protection and climate change to health, an increasing number of people are concerned about the future of our planet and want to see change to ensure a socially just and climate-friendly economy and society that conserve resources. There is also an increasing expectation that the financial industry will make an active contribution to the change that is necessary. Young people are highlighting the environment as an important issue, and they are making their demands for a green financial center loud and clear in the streets and in the media. Parliament has imposed a corresponding obligation on the financial industry as well, specifying in the recently concluded CO2 Act that financial flows must be climate-friendly. And what is the financial industry doing?
Trend toward investments with a positive impact
Sustainable investments have existed in Switzerland for nearly four decades, and the trend toward such investments has accelerated significantly in recent years. According to the current market study on sustainable investments conducted by Swiss Sustainable Finance, 1,163 billion Swiss francs are currently invested in sustainable investments, accounting for about a third of the assets under management in Switzerland. Compared to the previous year, the volume has risen by an impressive 62 percent. This trend reflects the changing priorities of both private and institutional investors, who understand that social and environmental concerns can be combined with economic decisions, thus accelerating an urgently required change process.
What the recent market study makes particularly clear is the strong growth of different approaches that all aim to make an active contribution to change. One example is the increased dialogue with corporate management teams to make their business practices more sustainable. Actively exercising voting rights and investments that contribute directly to reducing poverty or that invest in green solutions are also gaining in importance. It seems that investors are increasingly discovering their influence – and using it.
Enormous capital requirements for sustainability
If we look at how much capital is needed to reach the global sustainability goals, it quickly becomes clear that there is still a lot of work to be done. An average of 3.5 billion US dollars in investments is needed annually in order to reconfigure global energy systems and achieve the goal of limiting rising temperatures to 1.5 degrees as laid out in the Paris Agreement. The Intergovernmental Panel on Climate Change (IPCC) published this enormous sum in a report that received a lot of attention – and it does not even take account of the measures needed in other sectors, such as agriculture and real estate, to say nothing about measures to achieve other sustainability goals, such as improved education, fighting hunger and access to water. But how can this much money be generated each year?
Financial flows in all areas are relevant
The sustainability goals that have been set can only be achieved if all financial flows are structured sustainably, including public expenditures as well as direct investments by companies, financing by banks and investments by investors. In December 2019, the EU introduced a "Green Deal" that aims to do precisely this: structure all financial flows sustainably.
There need to be CO₂ costs that ensure that climate-friendly technologies can penetrate the market quickly and make CO₂-intensive technologies obsolete.
Investments in environmentally-friendly technologies need to grow and innovation in industry must be promoted. The energy and mobility systems must be restructured to make them climate-friendly, and buildings need to be modified to make them as energy-efficient as possible. As the basis for these efforts, a comprehensive taxonomy of all economic activities deserving of the "green" label has already been initiated. Companies are to report on the extent to which their products and activities meet this standard. Based on this, banks and asset managers will then offer products that steer financial resources in this direction. When it comes to the role of the financial sector, sustainable investment products are by no means the only financial products that are important. Other instruments such as green bonds, green mortgages, insurance solutions for renewable energy and community financing for solar installations that directly promote new green projects may be even more effective. The potential of many of these financing solutions is far from fully exploited, but there are in some cases considerable barriers to broad use of them.
Necessary to have the right price signals
However, it would be wrong to say that banks and asset managers alone need to act. A crucial factor for increasing the sustainability of financial flows is sending the right price signals in the real economy: "Ultimately, there need to be CO2 costs that ensure that climate-friendly technologies can penetrate the market quickly and make CO2-intensive technologies obsolete." Companies have to do their part as well. They need to provide themselves and their stakeholders with a transparent account of the measures they have implemented to protect the environment, to conserve resources and to ensure fair working conditions. With respect to financial products, greater transparency about the sustainability of investments is needed as well – especially as there are currently no uniform standards in this area. The financial industry has recognized this and is working intensively on creating more clarity in the sustainability universe.
Everyone needs to do their part
The coming years will be crucial in setting the course for a sustainable future. All stakeholders must do their part: the politicians who create the framework conditions, the clients who clearly express their desire for environmentally and socially responsible products and the banks that provide and actively offer suitable products.