Sustainable Investing: Trend or Necessity?
Nannette Hechler-Fayd'herbe, Head of Investment Strategy at Credit Suisse, speaks about sustainability in the financial industry and the emergence of new markets.
Simon Staufer / Simon Stücheli: Ms. Hechler-Fayd'herbe, how will the topic of sustainability change the financial industry over the next five years?
Nannette Hechler-Fayd'herbe: New markets are emerging, and as a result so too are new products. As banks, we are intermediaries with the capability of creating vessels that can facilitate investments in these markets and drive forward environmentally-friendly and sustainable investment. This trend became visible in Europe a while ago, and we can increasingly see it in emerging markets as well, most notably in Asia (e.g. "green bonds"). An increasing number of funds and solutions that focus on – or at least include – the topic of sustainability are being offered, and this trend is likely to accelerate further over the coming years.
What incentives can the private sector create to advance environmentally-friendly and sustainable investment – and what role are governments assuming in this respect?
The fundamental purpose of the private sector is first and foremost to ensure liquidity and capital. Over the last few years, we have seen expansionary monetary policy, and there is now plenty of capital for which new investment opportunities are being sought – in an era where cash yields very little return or even none at all. And many young investors in particular additionally want their capital to be sensibly invested from an ethical perspective, i.e. so that it contributes to sustainability. The private sector is creating investment products to meet this need, and it is also developing standards via associations in order to set out, for example, what products may be designated as "green bonds", or the criteria by which certain unsustainable investments may be excluded from a portfolio. Governments as well as supranational organizations are setting up the corresponding framework for all this, by drawing up rules and incentive structures within which the private economy can then operate.
You mention supranational organizations. In 2015, the UN formulated its so-called Sustainable Development Goals (SDGs), a core element of the 2030 agenda for Sustainable Development. Will these comprehensive goals have the effect of making sustainable or environmentally-friendly investment even more popular?
I definitely think the SDGs can make a contribution. Of course, as mentioned, there is already a discernible trend, and so there is a major growth market. But such an institutional framework particularly at this high level, provides additional support and visibility, as well as heightening awareness of the urgency of this issue.
An increasing number of funds and solutions that focus on the topic of sustainability are being offered, and this trend is likely to accelerate further over the coming years.
But is the trend toward environmentally-friendly investing progressing fast enough? According to the WEF 2016 Global Risk Report, "failure of climate-change mitigation and adaptation" represents not only one of the most likely global risks we face in the near future, but also the global risk with the greatest potential repercussions.
Climate change could indeed be one of the greatest challenges of our time, and ultimately it is not easy to evaluate whether developments in this area are progressing quickly enough. However, regional distinctions are quite clear. Europe has long played a pioneering role in the area of environmentally-friendly investing, with Switzerland and the Nordic countries very much to the fore. The US has not yet come as far in this respect, but it has a flexible economy with a track record of reacting very quickly and efficiently if prices create the right incentives. For example, the installation of solar panels on single-family homes is rising at a very significant rate in a number of American cities. And with their large populations, the emerging markets obviously have a key role to play: In these countries, the focus tends to lie on economic prosperity first, but once this is achieved to a certain degree, sustainability issues start gaining traction. But here too we are seeing the emergence of a trend, and in the case of China in particular: Here the government has increasingly been promoting a more sustainable approach to resources in recent years, and the pollution of a number of cities is likewise obviously drawing the attention of the population to this issue.
Can investments that are explicitly environmentally friendly – or at least encompass environmental criteria – be just as profitable as those that disregard such aspects, or does a focus on sustainability inevitably limit the financial return?
That's a key question for investors. Over a prolonged timeframe, there are essentially no return disadvantages that we have observed, particularly when risk aspects are taken into account too. Over shorter timeframes, environmentally-friendly portfolios can be subject to certain fluctuations, such as when investments would be particularly financially attractive in sectors that would otherwise be excluded or limited in an environmentally-friendly portfolio on the basis of exclusion criteria. So-called "sector biases" can have repercussions on performance from time to time, although under certain circumstances these can also be positive. Moreover, sustainable indices often have a good risk/return profile; in other words, significant losses are actually less likely in many cases.
Where do you see particular potential in the area of sustainable investments – and where do you see a need for more caution?
Looking at the market right now, I think green bonds – which I mentioned earlier – are interesting. These are fixed-income products issued by borrowers that finance environmentally sustainable projects. The volume of green bonds has shot up in recent years, from just over USD 3 billion in 2012 to more than USD 40 billion in 2015. Another interesting area as I see it is microfinance, which involves the provision of small loans to people at the lower end of the income pyramid. On the one hand, investments in this area can make a valuable contribution to economic development, while on the other they are well suited to portfolio diversification, as they offer investment opportunities that have relatively little correlation with the situation in global markets. By contrast, investments in alternative energy sources have proved volatile: Depending on the type of renewable energy and the country in question, there have been variations in the degree to which such sectors are subsidized, which in turn has repercussions for the corresponding investments. Similarly, they are also to a certain extent dependent on the development of the market for fossil fuels.
What advice would you give now to a small investor, i.e. a retail client, who wants to invest in sustainable investments?
Small investors in particular are often interested in limiting risk, and so prefer to adopt a rather conservative investment approach. This makes microfinance, for example, particularly interesting for many of these investors. But as I said, a number of sustainable investment approaches offer good risk/return profiles, as well as making it possible to incorporate personal values into an investment portfolio.