The bear market isn't making exceptions for sustainable investments, according to the findings of a Swiss industry study. Funds with real impact are still in their infancy.
After substantial gains since 2018, volumes of sustainable investments declined significantly for the first time last year, the latest market study by Swiss Sustainable Finance (SSF) said on Tuesday.
Client assets managed according to sustainable principles declined 19 percent to 1.61 billion Swiss francs ($1.80 billion) last year from 1.983 billion francs the year before against the backdrop of a very difficult year on the stock market for most asset classes.
More Cautious Interpretation
Although the value of the sustainability share of total assets at 52 percent didn't change significantly, it doesn't explain away the setback in Swiss asset managers' sustainability business, with several factors contributing to the decline.
Last year, negative market performance was to blame for 18 percentage points of the decline, while a more cautious interpretation of sustainability-related investments is responsible for the rest.
The latter is a likely sign the industry is taking accusations of label fraud on sustainable products via «greenwashing» seriously, as well as the legal consequences stemming from such practices.
Running on Impact
Sustainability-related investments were also unable to escape the bear market, SSF head Sabine Doebeli said upon release of the study. Despite the negative impact on volumes, however, sustainability-related investments were able to record inflows last year.
Two segments, in particular, succeeded in doing so. Sustainable thematic investments attracted 86 percent more client money, while impact investing with measurable sustainable impact increased by 80 percent.
This can be seen as a sign investors don't want just good intentions in dealing with the environment, society, and governance (ESG), but accountable progress toward a sustainable economy. Portfolios focused on reducing carbon footprints in line with the Paris climate targets now manage 375 billion Swiss francs.
Three Viewpoints
While that sounds like a lot, there is still a long way to go to achieve the desired impact. After years of effort, the market still lacks a universal definition of «sustainable investments.» Instead, a hodgepodge of different interpretations prevails. According to the analysis, 569 billion Swiss francs, the largest share of the 1.61 billion francs in assets with a sustainability connection, have to satisfy five or more approaches simultaneously.
If the Asset Management Association Switzerland's (AMAS) narrower definition of sustainable goals is used, 85 percent of the market or 1.38 billion francs of investments still remain. The definition excludes products investing only according to ESG exclusion criteria or ESG integration.
In a pilot study, the association applied the template of a Eurosif, SSF's European equivalent, white paper classifying investments according to their main objective and level of ambition to contribute to the transition to a sustainable world. Five types of investments are distinguished, from low-ambition basic SSG investments to actual impact-generating investments.
No More Classification
Only 20 percent of investments advertised as sustainable in Switzerland have a clear impact link, whether investing in companies or the whether the investment is impactful.
Three views, three results. This shows the tightrope Swiss asset managers must continue to walk towards advancing what is a promising sustainability business. The confusion among financial professionals increased when it comes to which classification should be applied for distribution in the EU. The percentage of funds with no disclosed classification climbed from 39 in 2021 to 51 percent last year, according to the study.
Seeking Overarching Regulations
The lack of a clear, universal definition of sustainable investment concepts and methodologies shows the need for coordination between regulators and market participants. Whereas the industry previously sought a solution in self-regulation, it's now leaning toward clear regulatory guidelines. The industry association calls for overarching, principles-based regulations for all financial sectors, strengthening investor protection and the international competitiveness and reputation of the Swiss financial industry.
The guidelines from the federal government are already in place. At the end of last year, the Federal Council adopted a corresponding report from which no fewer than 15 measures are to be applied in the industry by 2025 on how Switzerland's financial center can expand its position as a sustainable finance location.
