The third record summer in this still relatively new century ensured that it is not only environmental activists, scientists and isolated media or politicians who are highlighting climate issues. The topic has finally become part of the mainstream. For many people, their enjoyment of the nice weather is tempered by worries about the future. Melting glaciers, plastic waste in our oceans, dead fish, floods in Asia, hurricanes in Florida and the Gulf region or people wearing shorts in Greenland are there for everyone to see and experience – in the here and now. Such news are almost the order of the day.
Credibility above all
The problem with big issues is that short-term-oriented opportunists unfortunately jump on the bandwagon too. This applies to both the supply and demand side. In very simple terms, it means that sustainability has now become a label for most things – and conversely nearly every product has sustainable targets. But where is credibility needed if not with this issue? Anything claiming “sustainability” must also deliver sustainability.
Moreover, a more sustainable development also requires us – and rightly so – to take this issue seriously and also deal with it on a sustainable basis so that it is not sidelined by the next trend.
Liechtenstein and its banks are doing just this. All 11 municipalities have been labelled Energy City since 2013. Liechtenstein is therefore the only country in the world that can call itself an “energy country”. The label is a recognition of sustainable and exemplary results in the development of municipal energy policies and thus symbolises how broadly sustainability is ingrained in politics and among the general public. Our banks’ business models also differentiate themselves from short-term-oriented banking. The banks had been on their way to being sustainable with their products long before anyone was talking about the issue. A 2016 study of all local funds produced positive results: although the assessment mostly related to conventional funds, the average ESG rating, which is a benchmark used to measure ecological and social sustainability as well as good corporate governance, was almost 60 points. This is an impressive figure. The results show that a large number of Liechtenstein equity funds largely met the ESG criteria at an early stage – voluntarily and without any regulatory pressure.
International financial centres for sustainable investments
For us, sustainability is not a fad, but goes beyond purely ecological aspects and must be understood holistically. Many talk about it, but we want to act. For this reason, the Bankers Association joined the International Network of Financial Centres for Sustainability in April this year. The network was founded in September 2017 when Italy held the G7 presidency; it is a global platform aimed at conjointly taking measures to accelerate the growth in sustainable investments. The following 17 international financial centres currently belong to the network (in alphabetical order): Astana, Casablanca, Dublin, Frankfurt, Geneva, Hong Kong, London, Liechtenstein, Luxembourg, Milan, Paris, Seoul, Shanghai, Shenzhen, Stockholm, Toronto and Zurich. The Bankers Association and its members therefore do not see the issue of sustainable investments as just a challenge but as an obligation and an opening of major opportunities. To establish the topic more broadly, the Bankers Association is organising an international conference on 30 November 2018 in Vaduz in conjunction with various foreign banking associations.
Banks take an important role in the fight against climate change
What has climate change got to do with banking? To achieve the goals of the 2015 Paris Agreement on Climate Change, i.e. the goal of two degrees Celsius, there needs to be an investment volume of some additional EUR 180 billion in the EU alone. The consulting firm PwC estimates that the annual investment required worldwide to achieve the 17 Sustainable Development Goals (SDGs) agreed by the United Nations in September 2015 and their 169 targets is USD 7 trillion. Currently, one-seventh of this enormous sum is covered by the public sector. Highly indebted countries simply do not have the resources to deal with this monumental challenge of combating hunger, poverty, drought, climate change, etc. A substantial part of the financial resources must come from the private sector. Offers, i.e. more financial products that invest in energy-efficient and climate-friendly companies and projects, must be created. Today the world’s largest asset owners and investment managers are already obliged under the Montreal Carbon Pledge to disclose the CO2 footprint of their investments. In any event, the necessary capital is available on the market. According to OECD estimates, the assets under management of institutional investors alone are some USD 83 trillion worldwide. And here the banks come into play as traditional intermediaries, as it is their job to mobilise and channel these financial resources.
Uniform classification system
It goes without saying that the legislator also gets involved in these situations. And quite right too. At EU and global level, intensive efforts are under way to develop a uniform taxonomy, i.e. a uniform classification system. On 24 May 2018, the EU Commission published its proposal for an initial package to promote EU-wide sustainable growth and more sustainable financial systems. The regulatory package is based on the action plan published by the Commission in March of this year aimed at adding weight to the Paris Agreement on Climate Change and the United Nations’ Sustainable Development Goals. But the call for this type of taxonomy also comes from the financial industry itself. At the G7 high-level meeting in Halifax in mid-September, the International Network of Financial Centres for Sustainability acknowledged the need for an internationally uniform understanding of green and sustainable investments. This should also enable investors to separate the wheat from the chaff. As a result, the issue of sustainability should also be more in focus in the investment advisory field. Here too, there is already a proposal from the EU Commission about how MiFID II, the EU financial services directive, should be amended.
Values rather than short-term performance – major changes on the demand side
Fortunately, there will also be fundamental shifts on the demand side. In the next 20 years, 460 billionaires will bequeath around USD 2.1 trillion to the next generation. This means that high-net-worth individuals (HNWI) and the young generation in particular will play a key role in transforming the economy towards being more sustainable. Driven by values rather than material wealth and keen to change our environment and society, millennials are not just interested in short-term performance, but also in whether their money is invested responsibly.
Sustainable investing is becoming the norm
Cynics always take this opportunity to highlight the supposedly low returns of sustainable investments. But they are living in cloud cuckoo land. Studies have shown that in the last eight years, there have been minimal differences in the performance of the MSCI World and MSCI World ESG Leader Index. I am positive that this difference will soon shift in favour of sustainable investments. Ecological and social aspects as well as the associated risks must be factored in even more in future. This means that non-sustainable investments involve higher financial risks for long-term investors which will lead to lower returns over time.
Sustainability and sustainable investing are part of the DNA of Liechtenstein and our financial centre which is characterised by thinking in generations. This business area was developed carefully and therefore very credibly over many years. Today, it is no longer a niche. The time when sustainable investing will be the norm is nearer than some may think.