Investors in Switzerland are well aware of the shift to a net-zero economy, but they struggle with implementation, a new survey of finews.com in collaboration with Lombard Odier Investment Managers reveals.
Civil society, governments, regulators, and corporations around the world are increasingly climate aware. To be sure, end of 2021 close to 80 percent of the global economy was under some form of net-zero target, from only 16 percent a year before. This rapid transformation is shifting the risk and return profile of financial market investments.
A recent survey of finews.com in collaboration with Lombard Odier Investment Managers (LOIM) suggests that while investors in Switzerland are in tune with these transformations, they also struggle with implementation. Specifically, over 75 percent of investors in Switzerland think that climate change affects the risk and return profiles of financial market investments.
Effective Strategy
When it comes to the perceived effectiveness of different strategies to invest in the climate transition, investors view offsets to reduce portfolio emissions as the least effective strategy, with over 12 percent of respondents even labeling it as counterproductive.
In comparison, over half believed that investing across sectors, including in highly emitting companies (such as cement or steel companies) based on assessing their ability to decarbonize, is an effective strategy. However, the majority (65 percent) of investors is uncertain (21 percent) or disagrees (44 percent) that ESG metrics provide sufficient insights to invest in the climate transition.
Preventing Investors from Making Robust Investment Decisions
«This finding is in line with industry and scientific research that found traditional ESG ratings tend to cause confusion amongst investors and offer little to no benefits in terms of financial outperformance,» comments Michael Urban (pictured above), deputy head of Sustainability Research and responsible for the survey on behalf of LOIM.
Furthermore, over half of the respondents agree that greenwashing is a problem and is preventing investors in Switzerland from making informed and robust investment decisions. «This echoes similar findings from the 2021 HSBC Sustainable Financing and Investing Survey, where 64 percent of U.S. investors say they are very worried about greenwashing and are concerned that greenwashing is now more widespread and sophisticated than ever before,» Urban adds.
Switzerland’s Leading Role
Respondents agree that new dedicated regulation (59 percent) and harmonized market standards (63 percent) could offer results in combating greenwashing. More agreed (47 percent) that Switzerland is a world-leading financial center for sustainable finance than disagreed (28 percent), with the remainder, are undecided. However, respondents generally agreed that more could be done for Switzerland to strengthen its leading role – just under half disagreed that no further measures are needed.
Over 60 percent of respondents agree that what is needed is more competitive products and investment solutions and more intensive cooperation between financial institutions and the government. There were mixed responses as to whether Switzerland should adopt the EU sustainable finance regulations (Sustainable Finance Disclosure Regulation (SFDR), EU Taxonomy, etc), with just over half agreeing that this would be beneficial (56 percent).
A Giant Greenwash
«Interestingly, much of Europe’s sustainable finance regulations were designed to fight greenwashing by setting the record straight about what is and isn’t green. The recent inclusion of natural gas and nuclear in the EU Taxonomy has mired these efforts in controversy, highlighting that the distinction between «green» and «not green» is not always clear-cut. In fact, some have gone insofar as to call it a ‘giant greenwash,» Urban elaborates.
«Controversy aside, while knowing what is or isn’t green is important, what the transition and climate investors really need to know is what is and isn’t becoming green. Many companies in industrial and material sectors, for instance, will be characterized by high emissions, high dependence on fossil energy, and high waste footprints.
Channeling Capital
Similarly, companies in the food industry may contribute to significant plastic waste or water use. Such impacts can only be reduced by channeling capital towards companies with credible and ambitious transition plans.
«However, since even companies leading the way in such efforts may still score poorly on these regulatory frameworks as of today, these initiatives may actually disincentive investment in transition leaders, and regrettably so,» Urban says.
New Metrics on the Market
«I am not that surprised but I am concerned that Implied Temperature Rise (ITR) metrics remain relatively unknown by the investment community as 60 percent of our survey participants indicated they were not familiar with ITR metrics,» Urban comments.
While ITR metrics are relatively new on the market, they are also significantly more complex and sophisticated than carbon footprints—the latter which is often the basis for the climate rating companies received under the E of ESG. «ITR offers a highly intuitive and science-based measure on the adequacy of the decarbonization trajectory of financial market investments—that’s precisely what investors need to invest in the transition with foresight and impact and it is exactly what is missing in conventional metrics as well as recent regulatory initiatives,» Urban says.
Great Awareness Among Investors
Over 70 percent of the respondents identified education as a crucial way to combat greenwashing, whilst over half believed that educational programs for market participants could help to cement Switzerland’s role as a leading green finance hub. By setting clear and market-leading standards to help investors to navigate the climate transition, Switzerland can do both: not only fight greenwashing but strengthen the country’s position as a leading global convener of green finance.
There is a great awareness among investors about the need to align portfolios to a net-zero target. However, it is also clear that implementation remains challenging for many investors. Sophisticated approaches such as the integration of Implied Temperature Rise metrics go far beyond conventional carbon footprints but require appropriate skills and expertise which investors need to access.
