Sustainable thinking. Always long-term oriented.
Burkhard Varnhold reflects on long term perspectives, ESG and investor behavior.
Financial service providers are in demand
Financial service providers also find themselves in demand. There is already a need for innovative services and products just to plug the funding shortfall at the macro level, which the World Economic Forum has estimated to be USD 2.5 tn. At the same time, families with low incomes are reliant on financial services at the micro level to gain access to education, healthcare, accommodation, and employment.
The Financial Initiative of the UN Environmental Program (UNEP FI), also supported by Credit Suisse, puts the annual capital needed to achieve the SDGs at an estimated USD 5–7 tn. The cooperation between asset owners and investment managers seeking profitable and SDG-compliant investment opportunities is explicitly highlighted in the UN Alliance for SDG Finance. The Positive Impact Initiative also invites banks, insurers, and investment companies to bridge the financing gap in a bid to achieve the SDG targets.
Institutional investors are the most active
The forerunners of sustainable investment in Switzerland are institutional investors, who by definition have long-term investment horizons. In 2017, fully 61% of all sustainable investments were held by institutional investors. According to the Swiss Sustainable Investment Market Study 2018 published by Swiss Sustainable Finance, the sustainable-investment market grew 81% to CHF 390.6 bn last year. Sustainable assets held by asset owners achieved the strongest growth, at 128%. Sustainable investment funds increased 47% while sustainable mandates were up 25%.
Public pension funds are leading the way, while smaller pension funds and notably private investors remain cautious. One possible explanation is that private individuals are still not all that familiar with the characteristics of sustainable investment products and their success metrics. The European Commission thus plans to introduce an obligation on financial service provider advisors to ask clients about and document their sustainability preferences.
Impact investing as best in class
Unfortunately, concepts like ESG investment and impact investing are difficult to define with any clarity. MSCI, one of the major providers of sustainable indices, breaks down ESG investments into three segments, each with its own investment objectives.¹ ESG integration assigns the highest priority to improving the risk/reward profile. Value-based investing enables investors to gear their portfolios to their own standards and values. Impact investing is brought to bear when investors wish to use their capital to trigger social or environmental change. Impact investors combine their investment approach with the clear expectation of being able to achieve a measurable social and environmental benefit and so come closest to a holistic way of thinking and acting.