The big interview on sustainability
Well positioned, but still a long way to go
With the Paris Climate Agreement, sustainable investments in the financial sector have really taken off. Because of the urgent need for action, politicians have taken the reins. The necessary regulations have therefore increased exponentially worldwide in recent years. Sustainable investments will soon be 'mainstream' or 'The New Normal'. It is important that sustainability in companies is anchored and exemplified in corporate culture and at the strategic level. This is the strength of the Liechtenstein financial center, since sustainability has long been one of our core values. Consequently, living and acting in a credible and responsible manner is a distinguishing feature for Liechtenstein. We have already achieved some things, but we are certainly not yet where we would like to be, let alone where we want to go. A major challenge for instance is how technological change can be used to transform the economy into more sustainable ones.
More in the following interview with Simon Tribelhorn in the Volksblatt of 11 April 2019
Mr Tribelhorn, the Roadmap 2020 of the Liechtenstein Bankers Association includes sustainability as one of the three main strategic pillars. Why is that the case?
Sustainability is a question of attitude and culture. It's an expression of what values are important to someone. For companies, this means that sustainability must be embodied in the corporate culture and at the strategic level, and it must therefore be exemplified from above. This is precisely where I see the great strength and opportunity for our financial centre. Sustainability has been one of the core values of our actions not only since the Paris Agreement on climate change and the 2015 Sustainable Development Goals. With the Roadmap 2015 and its continuation in the Roadmap 2020, we merely set this down in writing for ourselves and consciously established it again as a guiding principle.
My impression may be wrong, but sustainability seems to have come up again and again over the years – almost like a fashion, which is completely counterproductive, given the importance of the topic. Aren't we just back in a phase of hype?
Sustainability has indeed been talked about for a long time. For some, it's an expression of conviction, while for others, unfortunately, it's merely cool, a fashionable word, or a marketing gag. The meaning of the term has been and sometimes still is severely stretched. That's why it's almost become taboo in some circles. I hear from many people that they can no longer stand to hear ‘sustainability’ as a term. This is unfortunate, because it damages the acceptance and credibility of those who commit themselves and assume responsibility. I am convinced that this was sometimes a reason why the topic did not gain traction in the financial sector before. It was not until the Paris Agreement that sustainable investments in the financial sector really gathered steam. This can be described as the hour of its birth, because from that point on, politics took the reins due to the urgent need for action. Since then, it's really taken off. Regulations in this area have increased exponentially worldwide in recent years. So today, we're at a completely different point – and sustainable investments will soon be ‘mainstream’ and ‘the new normal’.
But what does sustainability mean? The term as such is very abstract and barely tangible. How would you explain it?
Simply put, it is about fulfilling one's responsibility towards society and the environment. This should also be reflected in the way money is invested and taken into account alongside other factors such as returns and liquidity. For this purpose, the ESG approach has established itself as the standard for sustainable investments in the financial industry. ‘ESG’ stands for environmental, social, and governance. Currently, at the political level, the focus is rightly on environmental aspects. The Paris Agreement of 2015 set out the goal of limiting the rise in temperature to 2 degrees Celsius. To achieve this, an additional investment volume of about EUR 180 billion will be needed in the EU alone. However, the challenges we face as a society are far more multi-layered and complex. Also in 2015, the United Nations therefore adopted 17 Sustainable Development Goals (SDGs). According to the consulting firm PWC, the annual global investment volume required to achieve these goals is even USD 7 trillion. Currently, only one seventh of this amount is financed by public funds. This means a substantial portion must come from the private sector. Enough capital would be available in principle, given that even just the assets managed by institutional investors around the world amount to about USD 83 trillion. The financial sector and banks in particular can and must therefore play a central role in mobilising and channelling these financial resources. This brings with it a great opportunity, especially for our financial centre. The question will soon no longer be, why sustainable?, but rather, why not?
That almost sounds too good to be true. Simple investing, thanks to digitalisation maybe even just with two clicks on a smartphone, in order to support sustainable projects, still generating returns and saving the world at the same time. If someone were to say this is naive, what would your response be?
This isn't naive or futuristic. It simply means that one recognises the sign of the times and also has a plan. Right now, people are needed who articulate this as a goal and implement it consistently, i.e. take on leadership. You no longer have to be a visionary to realise that sustainability is our future.
The Liechtenstein Bankers Association took up the cause of sustainability roughly in 2011. What has been achieved in practice so far?
We have achieved quite a bit but we are certainly not yet where we would like to be, let alone where we want to be. However, our efforts have played into the hands of developments at the international and European level. In the last two years in particular, we have been able to achieve a number of milestones. For example, we have joined the Financial Centres for Sustainability, an international network for sustainable investments. Within our Association, we have also set up a dedicated sustainability expert group consisting of all member banks, and in that way we have created the conditions for firmly enshrining the topic of sustainable finance in the financial centre through the exchange of experiences, best practices, and basic and continuing training. Finally, last year we organised a major international conference on sustainable investment, creating a platform for discussing new approaches and solutions.
Is this enough to bring the issue out of the niche and raise awareness of this important topic among mainstream private investors?
The answer is a clear no. We in Liechtenstein, like the financial industry as a whole, still have a long way to go. We still have the greatest challenge ahead of us, namely how to use technological change to transform the economy in the direction of greater sustainability.
Let me express this more pointedly: Let's assume that I turn to my client advisor with the desire to combat hunger in the world at the same time as making an investment. If necessary, I'm even willing to give up some return and maybe assume a slightly higher risk. Do you think that my advisor can give me a recommendation for a specific product?
Of course. Maybe not for a single product, because this doesn't make much sense from an overall perspective in the context of investment advice, depending on the situation. So you have to look at the whole portfolio. But a lot is being done in this area in particular. Examples include the LGT Sustainability Rating for equities, bonds, funds, and ETFs for private investors, the LLB's ecological and renovation mortgage, and the Primus-Ethics asset management solution from Neue Bank.
Isn't this a basic problem? For investors, there are products for almost every investment type, in a variety that can hardly be kept track of anymore. But isn't there a lack of ‘mass consumer’ sustainable products that are easy to understand, transparent and safe, and at the same time promise returns?
That's a good and fair question. However, sustainable investment funds in Switzerland alone more than doubled between 2014 and 2015 from CHF 71 billion to CHF 191 billion. And this trend has continued to intensify. The green funds listed on the London Stock Exchange have even tripled over the last five years and cover a wide range from clean technologies to renewable energy projects. This means there's already a large number of financial products, but certainly not enough. It is clear that more financial products need to be created to invest in energy-efficient and climate-friendly companies and projects.
Unfortunately, there is still little data available for Liechtenstein. In addition to the data material, we also lacked well-founded and convincing arguments for a long time to demonstrate that or why Liechtenstein financial products in particular are very sustainable and meet the needs of sustainability-oriented investors. So together with the Liechtenstein Investment Fund Association (LAFV) and the Association of Liechtenstein Charitable Foundations (VLGS), we conducted a sustainability study in 2016. The aim of the analysis was to measure the portfolio quality of equity funds domiciled in Liechtenstein with respect to ESG factors. We wanted to examine to what extent the equity funds launched already meet these criteria. The results were impressive. More than 50 equity funds domiciled in Liechtenstein achieved an excellent ESG rating. 60% of the equity funds reported in the ESG Market Report Liechtenstein even achieved an ESG fund rating of 'A' or higher. The results show that many local equity funds already meet the ESG criteria to a high degree. The key will therefore also lie in further expanding our range and expertise, creating transparency, and actively informing and advising our clients accordingly.
Isn't this also the Bankers Association's responsibility? For years, various publications have repeatedly emphasised that sustainability could certainly become a serious pillar of the financial centre. Specifically: Does the Bankers Association have plans to enshrine the issue much more strongly in the financial centre?
Yes, we clearly see that we share responsibility as well. Our goal this year is to conduct a comprehensive inventory of the entire sustainability situation with all the banks – across all business divisions and all corporate levels. This process is already underway. The goal is to find out the potential opportunities and risks and then be able to define a targeted plan of measures at the level of the Banking Association. We will also provide our members with the best possible support in light of the forthcoming EU regulation.
Although the technology has developed massively in recent years, it is still a long way from anyone with a phone being able to financially support a rainforest reforestation project in South America simply by clicking a button. Nowadays, you can order just about anything from online retailers, whether paper clips or washing machines, with just one click. For me, this makes it look as if the interest in sustainable financial products simply isn't so great after all.
I wouldn't put it that way. Quite a bit has happened on the demand side as well. In Switzerland alone, current demand is estimated at about CHF 700 billion, far exceeding supply. The advance of digitalisation will simplify many things. For instance, it will help us to automate processes, reduce costs, and achieve positive economies of scale. Moreover, it has been an obstacle for a long time that the effective impact of an investment or portfolio in terms of ESG factors has been difficult to quantify and measure. With the help of digitalization, this will be much easier and better in the near future.
The Government has now included sustainability in its recently presented financial centre strategy. The strategy states that sustainable action should already be established as a component of culture in the Liechtenstein financial centre. The LBA reacted immediately and called upon the Government to view this issue also as an important future competitive factor and to advocate for optimal framework conditions. That sounds as if Liechtenstein is not as far ahead at the political level as you would like it to be. Which in turn is surprising, given that the topic has been on the table for so long and the communication and decision-making distances are so short, as is often emphasised.
Similarly to the international standards in tax matters, the question will arise as to whether we want to be first movers, coattail riders, or laggards. Being a laggard is certainly not an option. With our Blockchain Act, Liechtenstein has assumed a pioneering role in digitalization. We should do the same together in the field of sustainability. For this reason, we welcome the fact that the Government has included sustainability in its financial centre strategy. This shows that the topic is also important to the Government and that it shares our view of the potential opportunities and the need for action.
Speaking of politics: In May of last year, the EU Commission published a proposal for a comprehensive regulatory package to finance sustainable growth. What's happening in Brussels?
The EU is clearly setting the pace in the area of sustainable investments. The regulatory package aims to strengthen the Paris Agreement and the Sustainable Development Goals of the United Nations. It consists of four concrete proposals: First a unified taxonomy or an EU classification system of sustainable financial products to clarify what is and what is not sustainable. Second the obligations for institutional investors to integrate ESG criteria into their investment decisions. Third the development of low-carbon benchmarks, and foruth adjustments to all securities regulations to take into account and integrate ESG criteria into the investment and advisory process. The European Parliament and the EU Member States reached an extensive political agreement on this part of the package just about a month ago. A new regulation will set out all the details.
We all know that much of what is decided in Brussels will eventually end up in Vaduz. Can you already estimate today what political developments can be expected here in the coming years?
Yes. As an example, we can show this in concrete terms on the basis of the EU regulation mentioned above. It adjusts numerous key EU enactments in the financial services sector (e.g. MiFID II) and thus covers the entire financial services sector. As a regulation, the new rules have direct effect. There is therefore no need for them to be transposed into national law. And the regulation is of relevance for the EEA and thus also for Liechtenstein. It must be applied already 12 months after publication. So the momentum is enormous. I believe that many people still underestimate both the scope and the speed.
For many years, the financial industry has been groaning about more and more regulations. Do you really believe new regulations in an area that is currently a niche by comparison will be welcomed with open arms?
The cycle in which laws are revised or rewritten has been massively shortened in recent years. As a reaction to the financial crisis, there has been unparalleled overregulation, which also led to a massive rise in costs at the institutions. Nevertheless, we have never spoken out against regulation in fundamental terms, but rather against unnecessary regulation and in favour of practice-oriented, moderate, and proportional regulation. In the climate sector, politicians have waited a long time to adopt regulations. Considering the urgency and importance of the Paris and UN goals, regulation really is needed now. Or in the words of Paul Achleitner at this year's Finance Forum: ‘Regulation is the reaction to perceived market failure.’ Regulation provides the necessary framework for guidance and legal certainty. Sustainability is also increasingly becoming a question of credibility. It must be ensured that if something is labelled sustainable, it really is sustainable. There's no room for greenwashing anymore. We need transparency.
And the returns? Are sustainable investments at the expense of expected returns?
No, that myth has persisted for too long. The opposite is true. Research has shown that already over the last eight years, there have been only minor differences between the performance of the MSCI World and the MSCI World ESG Leader Index. According to the Bank of England, in almost all of the 2,000 studies it examined, sustainable investments performed just as well or even better in terms of returns. Unsustainable investments therefore already entail higher financial risks for long-term investors, which will lead to lower returns over time. In the future, this trend will even intensify as environmental and social aspects and the associated risks are priced in even more, which will have a negative impact on returns.
There is probably broad agreement that the United Nations Sustainable Development Goals and the Paris climate goals can only be financed through sustainable investments. In many places, students are now regularly demonstrating for climate protection. Doesn't this mean that a generation of digital natives is already emerging for whom sustainable systems will be the absolute standard in the future, which already explains the need for action for us today?
Absolutely. According to the Global Impact Investing Network (GIIN), to which 1,300 impact investors belong, the volume of impact-related investments has more than doubled in recent years to an estimated USD 502 billion. This increase is primarily attributable to Millennials. In addition, about 460 billionaires will pass on roughly USD 2.1 trillion to the next generation over the coming 20 years. This means that the High Net Worth Individuals (HNWI) and in particular the young generation will also play a major role. This generation is driven less by material wealth than by values. It wants to change the environment and society. So Millennials are not only interested in short-term performance, but also in the question of whether their money is being invested in a meaningful and responsible way. And the younger generation can also do math. Environmental and social aspects and the associated risks will have to be priced in more in the future. Longer-term investors are aware that unsustainable investments involve financial risks and will therefore be less profitable in economic terms as well. And here we come full circle with digitalization. For this generation, the daily use of digital technologies goes without saying.
You have now shown in simplified terms that there are both needs and necessities, that money is available in principle, and that politics has started moving to make a difference with sustainable investments. It appears as if all these circumstances now ‘only’ need to be brought together. So what do you think must happen for sustainable investments to become a strategic pillar not only of the Bankers Association, but of the entire financial centre?
Credible and responsible action that is actually put into practice is not only an obligation, but also a distinguishing feature. Especially if we succeed in establishing this even better as an integral part of the culture of the entire financial centre. This requires coordinated cooperation based on partnership between the State, the business sector, associations, and research, as well as a structured process.