"I want fair, social capitalism."
The young economist Falko Paetzold is fighting for a more equitable, healthier and more environmentally friendly world. His aim is to encourage private investors, particularly those with assets in excess of 50 million dollars, to invest sustainably.
Mr. Paetzold, how is the world doing these days?
Better than 20 or 50 years ago, in many ways. But as a society, we are facing what are perhaps our biggest challenges, and we have to be honest in recognizing them in order to implement solutions.
I am referring to the ongoing climate change, the lack of global health care, water shortages, slavery and poverty. At the same time we have extremely fascinating and marketable solutions for these challenges, from renewable energy sources and more efficient energy utilization to massive scalable health solutions and fair supply chains. These solutions can be very exciting for investors – and for all
You intend to address these global challenges with the wealthiest individuals in the world. Why?
The distribution of global wealth has developed with extreme disparity ever since the seventies – everyone is aware of this. But just how extreme that disparity is, that might still be surprising. Around 100 trillion Swiss francs – over half of global wealth – is held by significantly fewer than one percent of the population. Imagine what could be achieved if this one percent were to invest its capital in such a way as to combat poverty or climate change at the same time.
Should the ultra-wealthy invest their money in foundations like Bill Gates does?
No, we cannot reach the huge investment volume required merely through philanthropy and charity. I am talking about sustainable investment as the wide spectrum of investments available today that have a business case, investments that generate returns both for the investor and for society. You can invest in companies that will use that capital to actively develop solutions to the challenges we face – and that are financially worthwhile. You can give preference to companies that uphold ethical, social and ecological standards. You can support shareholder groups who push these standards through at companies that are not meeting them yet. There are solutions for all kinds of investors. In this way, it could certainly also make sense to invest in dubious companies, working as an investor on improving them – we cannot be intellectually lazy. We need to be honest in our search for solutions and effective levers.
Are the very wealthy interested in this topic?
Very much! Nine out of ten UHNWIs [editor's note: Ultra High Net Worth Individuals, the term for people with assets worth more than 50 million dollars] indicate that they are interested in sustainable investment opportunities. But only one out of ten is actually investing that way. There is immense potential there – and not only in terms of capital. Through their own companies, their vote as shareholders, their position in society and their relationships – these people have invaluable influence on other decision-makers and on policy.
Were you surprised to discover this openness to socially and environmentally responsible investment?
No. But I am often just so happy to witness the moment when the spark catches, that aha moment. As investors, why shouldn't we consider these fundamental issues like climate change, water scarcity or global health problems? That only makes sense when working with a very short-term horizon. This philosophy is seen more frequently among salaried employees and management. In contrast, very wealthy investors generally have a long-term investment horizon because their aim is to save their wealth for the next generation. Furthermore, portfolios that will succeed in the future promise better returns. No one wants to invest in tomorrow's losers. In addition, psychology has long shown that people want to achieve harmony between their ideals and their actions. We even see this principle in action for purchases, like the growth in healthy and organic food. Many people have just not yet realized that their wealth is very influential – and when it comes to UHNWIs, that lever is massive.
You opened the Center for Sustainable Finance and Private Wealth at the University of Zurich in July. What are its objectives?
First of all, we want to reach the point where UHNWIs are effectively integrating the issue of sustainability into the management of their wealth. Our goal in the longer term: Private assets should become a key factor in sustainable development. I want to lay the groundwork for a social and fair capitalism.
Do you see differences between the younger and older generations in terms of their investment behavior?
Older people tend to see this as two issues. On one hand, I generate returns, however possible. On the other hand, I give money to good causes, regardless of whether there might be market-based solutions. Younger UHNWIs can often see that this approach doesn't make sense – why create a problem that has to be "donated away"? They want to integrate sustainability from the beginning – for better returns and because it makes sense on a humanitarian and a societal level. The 20- to 40-year-old investors, also known as the millennial investors, have grown up knowing that there is climate change and social injustice. We are focusing heavily on this next generation.
At Harvard, you hold courses in sustainable investing for wealthy families. Who is in your classroom?
We have held the course three times now, each time with around 25 participants, all of them 20- to 45-year-old members of UHNW families from around the world. Participants can discuss their concerns and family conflicts openly and honestly. How can you talk to an uncle who holds a great deal of influence within the family and who doesn't believe in climate change? Should I include my cousins as co-investors? It is essential that we create a protected environment for discussions like these. That is also why I cannot mention any participant names.
Where do the participants come from?
Members of well-known major industrialist families from Switzerland took part. Our classes are very heterogeneous. A Brazilian family of investors meets the German pharmaceutical dynasty; the Swedish shipping family meets the Korean insurance clan or the Chinese family from the automotive industry. There was even someone from a Middle Eastern royal family, and after that, we were invited to hold a workshop on sustainable investments directly for the family.
Sustainable funds comprise only a small percentage of the entire investment market. Is that because of their reputation of earning a B- in performance?
That preconception is still around even though it has long been disproven. Scientific research has shown that sustainability pays off not only idealistically but also materially.
Why isn't more being invested?
Has anyone at your bank ever asked you if you want to invest sustainably? Or if you want to invest unsustainably? That's what I mean. Client advisors tend to keep this information from you – not because they think it isn't good, but simply because they lack the expertise.
What should asset managers do?
Address the topic internally. Inform the clients, who then in turn ask their client advisors. Also, offer innovative, new and smaller funds. Train the client advisors. In terms of the financial sector in general, the retail area is still poorly represented. Results of a study of test purchases showed that practically all retail client advisors held information on sustainable investments back from their clients. But I would like to highlight the fact that Credit Suisse is making good progress in this area. If it wanted to, it could take on a pioneering role in the future.
In another analysis, you reached the conclusion that when sustainable investments are a topic of discussion with clients, the banks profit. How so?
The bank benefits in different ways. When it comes to the topic of sustainability, active consultation makes a big difference. Otherwise, clients these days have the choice of using robo-advisors or exchange traded funds (ETFs). The important thing is to make the customers feel that they are being taken seriously and that the consultation adds value. Content is the way to achieve that. Advisors who talk to clients about their personal values are also creating an emotional and intellectual connection with them. In doing so, they are achieving greater understanding of their clients. Research also indicates that clients who are well informed about the sustainability of their portfolio can take a longer-term view and react with less volatility – and their investment deposits will not diminish as rapidly.
Do you see sustainable investments as an opportunity for the Swiss financial center?
Yes, immensely so. Sustainability could be the new competitive advantage for Switzerland as a financial center. There is a natural link, too. Switzerland and "Swissness" stand for high quality, stability, innovation and durability. Investing sustainably is built on the same values.
How sustainably do you live yourself?
In terms of investing, I concentrate on sustainable funds and start-ups in the sustainable finance area. I fly too much for my work. At least I compensate for the miles flown, usually by double; that is easy and effective. I eat very little meat and only what has been produced sustainably. I share my car and usually ride a bicycle.
I would like to add one more thing: My choice of career is no accident. I think it is important to be involved, both personally and professionally. Even when it comes to the average income, Switzerland is in the upper percentile in a global comparison. The absolute majority of the world's population has practically no influence on whether the shift to sustainable development succeeds or fails – but we do. We are extremely privileged and, therefore, we have a responsibility. And also, the change that needs to happen will bring with it enormous opportunities that we can turn into realities.