Sustainability is more than a trend
What is Germany’s most valuable bank?
It is the National-Bank in Essen. Its total assets amount to approximately EUR 4.8 bn. How is that possible? Deutsche Bank accounts for 270 times that amount, i.e. EUR 1,297 bn. Well, it’s all a matter of perspective. Rather than taking the (financial) value into account, the Institut für Management und Wirtschaftsforschung (German Institute for Management and Economic Research, IMWF) considered the (moral) values. In terms of sustainability, the small regional bank therefore ranks well ahead of the Frankfurt global player.
This distinction between sustainability and financial valuation is fading. At least according to Wolfgang Schlaffer, Partner of the strategy and management consultancy zeb. “In the long run, everyone will switch to sustainability and this will happen much faster than we all think.”
The Norwegian sovereign wealth fund invests according to sustainable principles, and the world’s largest asset manager Blackrock is changing its investment strategy to ESG criteria – environment, social, governance. In the future, sustainability will become an essential part of the investment process and risk management. Accordingly, investors will abandon investments that pose a significant sustainability risk, such as securities of coal producers. And, according to Schlaffer, these two players in the fund industry are only two examples of a comprehensive change. He has formulated six hypotheses on the subject of sustainability.
Sustainability is here to stay
Sustainability is not a trend. In five years’ time, we will no longer be talking about the question of whether sustainability is necessary, but only about how to achieve it. We are currently experiencing fundamental changes in the mindsets within economy and society. In recent years, the volume of assets managed in dedicated sustainable investment strategies has risen rapidly – and nothing suggests that this movement will be slowing down. Financial decision makers expect more from companies than just short-term returns and are looking for more sustainable investment solutions. Regulators and governments are broadening their focus and increasingly demand that sustainability be incorporated into investor information and advisory processes. There is a growing awareness of the role of ESG research and analysis in identifying potential investment risks and contributing to excess returns.
The meaning of the term “sustainability” is constantly changing
The concept of sustainability is not set in stone. It is subject to constant change in terms of content. Five years ago, climate protection was hardly an issue at all, yet today it ranks very high on the agenda (and in all probability will only be temporarily eclipsed by the coronavirus pandemic). However, there will be times when social aspects will once again come into greater focus, or when governance topics will become more important, such as the current case of Wirecard.
We need a definition of sustainability
There is no universal concept of sustainability. The legislator is trying to implement it successively. This is necessary to ensure legal certainty. On the other hand: if legislators overregulate and demand too much taxonomy, i.e. create too much bureaucracy, ESG products and services will become more expensive, which ultimately leads to sustainable investments not being promoted – as politically desired – but actually hindered. We need a framework, but a flexible one.
The “performance” argument is too short-sighted
Currently, some investors still like to use the lack of performance as an argument against ESG investments. A glance at Wirecard quickly puts this picture into perspective. In this case, governance requirements have been massively violated. Result: huge losses on the part of the investors. Does sustainability mean a loss in returns? I don’t subscribe to this theory. I believe – and studies prove this – that unsustainable behavior is actually associated with higher risks or losses and therefore does not pay off.
Sustainability is not about philanthropy
Those who wish to do good can make donations. ESG investments rather follow an economic rationale. Sustainability is ultimately a guarantee for stable corporate growth. The honorable merchant principle was not based on philanthropy, but rather on being ultimately more successful with such a sustainable business model. Anyone failing to act sustainably today will be subject to risk premiums from the capital market.
This is a global debate
We see unsustainable operations in the Amazon and Sumatran rainforests as well as in many of Africa’s mines. Still: the discussion about sustainability is gaining momentum. Europe may be leading the way, but the debate is global. Major asset managers such as Blackrock or investment banks like Goldman Sachs have geared their strategies towards ESG. The issue is gaining in importance for the major central banks and regulators, especially from a risk perspective.
Bottom line: the difference between an investment oriented towards (financial) value and one based on (moral) values is hypothetical – at least in the medium to long term. Investments that are not sustainable are not good investments because they involve too much risk. Sustainability and profitability will increasingly become interdependent. And then we will only be talking about how to achieve sustainability and no longer about the “if” question.
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