Le Temps (27.12.2021) - One fact about the financial industry that everyone agrees on nowadays is that, as a strategic allocator of private capital, it has a major role to play in reducing economies’ carbon footprint, and this is clear to see in the sharp growth of so-called “sustainable” funds.
In Switzerland, that category is now dominant on the investment fund market, accounting for 52% of assets under management, according to Swiss Sustainable Finance (SSF). The overall volume of sustainable investments in this country, which was lingering below CHF 80 billion in 2014, had shot up to CHF 1,520 billion by 2020, and the rise should continue at a steady pace.
Parallels with the tech sector
Carried along by this trend, market players have made grand commitments to prove their ability to think, act and invest sustainably. But the key for asset managers is not in how green they make themselves look but rather in how successfully they preserve their clients’ capital and create long-term value, which, let us not forget, is the prime mission of a private bank. In short, the finance sector can make a strong contribution to the environmental movement and speed it up, provided it delivers firm performances.
The age of seeing sustainability as an investment theme like any other is past. It must now be treated as a new dimension and an integral part of the investment process. A bank intent on participating in the transition will have a natural inclination to promote the sustainable nature of its investment solutions to its clients. And it will be all the more convincing for its genuine belief that companies with strong sustainability credentials or positive impact objectives have greater long-term value-creation potential than those that are resistant to change.
A compelling parallel can be drawn with the technology sector: the surge of new technologies in the 1990s deeply disrupted not only companies but entire sectors, culminating in what was dubbed at the time the “new economy”.
“The Swiss equity market has low exposure to carbon-intensive sectors like travel, automotive and energy, whereas it has high exposure to sectors with above-average ESG scores, such as healthcare.”
Initially seen simply as a trend, these technological innovations ended up altering the very structure of our lives and consumption habits, and have become a secular growth driver. Within two decades the tech industry in the US has outperformed all financial markets by 30% annualised.
Similarly, the world economy’s quest for “net zero” is, and must be recognised as, an industrial revolution generating investment opportunities. Clean energy, green infrastructure, circular economy and other carbon-neutral or positive-impact activities hold great promise for employment and growth. And like the technological revolution that started nearly twenty-five years ago, sustainability is a robust movement that is set to last, outliving any passing economic blips.
Long-term overhaul
So the route has been charted, although this economic and corporate transformation does carry certain risks as it is leading to a proliferation of firms in sectors that are far from mature. The challenge for asset managers will therefore be to navigate through the volatility generated by such an innovation boom, not to mention the widely varying levels of quality and potential among these new players. Also, this overhaul being a long-term one, banks will have to price the paradigm shift into their investment strategies without losing sight of the real economy’s trajectory. Such synchronisation will be paramount for creating long-term value in portfolios, as demonstrated this year when the move to favour renewable energy clashed with the peak in energy demand resulting in a surge in oil and gas prices.
The good news is that Switzerland definitely has the qualities to be a leader in sustainable finance: its equity market has very low exposure to carbon-intensive sectors like travel, automotive, energy, mining, natural resources or utilities. Conversely, it has high exposure to sectors with above-average environmental, social and governance (ESG) credentials, such as healthcare, as illustrated by the fact that Switzerland’s broadest market index, the SPI, has an “ESG Quality” score of 7.6 while the MSCI All Country World index is at 7.0. These features put Switzerland in an excellent position to capitalise on all the benefits this irreversible economic transformation will offer.
