It won’t have escaped anyone’s attention that forest fires followed by floods devastated the countryside across much of southern Europe in the summer of 2023. Indeed, it was the hottest summer on record, according to the EU’s Copernicus climate change service.
The extreme heatwaves that affected much of the northern hemisphere were made much more likely by climate change, according to scientists from the World Weather Attribution Initiative. As temperatures rise and freak weather proliferates, so demand for sustainable investing is intensifying and companies are under pressure to reduce energy consumption and make better use of resources. Indeed, new business models are emerging with a sharp focus on environmental and social impact.
Yet the demand for sustainable investing is not yet fully met by investment advisors. Research from Deloitte, the professional services firm, cites multiple surveys showing that investors have a strong interest in sustainable investing but want more support from their advisors. That suggests financial intermediaries could be missing a major opportunity.
Returning to Deloitte’s research, investor demand is evidently increasing. For instance, its review of surveys found that 79% of EU private investors consider sustainability important to how they invest. Yet 60% said their banks and advisors had yet to discuss sustainable investing strategies with them.
It’s a unique time as the global economy begins the technological and economic revolution needed to reach net zero carbon emissions by 2050. As the UN states, “the next decade will prove whether the world will succeed or fail in meeting these critical challenges.” Financial intermediaries need to adapt to this watershed moment, differentiating themselves through knowledge of sustainable investing’s different options, and combining financial return with purpose for the next generation of investors.
What this means for financial intermediaries
For financial intermediaries, sustainability offers a chance to take client relationships to the next level. Despite their interest, many private investors do not fully understand sustainable investing. Discussing how clients’ personal values affect their approach to sustainability topics can strengthen relationships. What’s more, competence in this area shows that the financial intermediary offers high-quality and innovative advice.
Yet sustainable investing is a complex field that’s continually evolving. Indeed, what are the different sustainable investing approaches? At a high level two of the main types are sustainable investing and impact investing. Broadly speaking, sustainable investing avoids investments in companies with harmful activities such as tobacco, while judging the success of an investment not just by its financial performance but also by improvements against environmental, social and governance (ESG) metrics, especially related to cutting greenhouse gas emissions. Impact investing goes beyond ESG, deploying capital to finance businesses and solutions that address specific environmental or social challenges.
Similarly, there’s a plethora of ESG analytical data from different providers that may be contradictory and confusing, including a degree of subjectivity. For financial intermediaries who are not specialists in sustainable investing, there are dangers in becoming lost in an alphabet’s soup of different metrics.
Indeed, as regulators around the world increasingly turn their attention to sustainable investing, a little knowledge is a dangerous thing. In Switzerland and the EU, for instance, the Self-Regulation Sustainability Guidelines and Sustainable Finance Disclosure Regulation, respectively, require advisors to consider sustainability preferences when giving investment advice. What’s more, across much of the world there are increasing regulations governing the labelling of sustainable investment products.
Julius Baer’s specialist expertise
Julius Baer can help financial intermediaries to deliver sustainable investments while minimising the risk of contravening regulations. We have a team of skilled experts across sustainable and impact investing who can advise you along your sustainable investing journey. Additionally, we can help to reduce greenwashing risk at point of sale.
Sustainable investing appears to be at an inflection point with increasing numbers of businesses looking to address environmental and social challenges. As extreme weather becomes more frequent, society is calling on the financial sector to play a critical role in allocating capital. Trillions of dollars will be required to engineer the zero carbon transition.
Within wealth management, financial intermediaries have an opportunity to meet demand for sustainable investing that remains largely unmet. But doing so requires access to specialist knowledge from a team of experts. At Julius Baer, we have been building just such a team to prepare for one of the biggest investment challenges of our time.