KPMG study: Sustainable investments

Sustainable investments are increasingly in demand from bank customers and investors. Thus, the volume for sustainable investments in Switzerland has increased strongly in recent years. A look at the figures from Swiss Sustainable Finance (SSF) shows that the investment volume increased tenfold from 2014 to 2018 (from CHF 71 billion to CHF 717 billion). Of this, around 90 percent of the volume is attributable to institutional investors. However, as the latest KPMG study "Clarity on Sustainable Finance" shows, uniform standards for measurability and reporting in the sustainability sector are largely lacking. As a result, financial institutions decide for themselves whether and how to integrate sustainability considerations into their business model. Accordingly, the way financial institutions deal with the issue of sustainability varies widely. For investors, this leads to insufficient comparability of investments touted as "sustainable." The increased awareness of the fragility of our economic system in the wake of the Corona crisis is likely to lead to greater attention being paid to non-financial market risks.

Regulation as a driving force

Many market players around the world are increasingly realizing that the capital markets themselves are not in a position to allocate capital in a way that supports the achievement of climate targets. Regulation is necessary in this context to address market inefficiencies. With its "Action Plan on Sustainable Growth" and the "European Green Deal", the European Union is currently implementing the world's most ambitious and comprehensive plan for regulation in various sectors. The EU deliberately wants to achieve a steering effect by eliminating market inefficiencies. The financial industry plays a key role in financing the transition to a sustainable economic system. Due to the feared, irreversible consequences of global warming, the EU is focusing primarily on limiting CO2 emissions and meeting environmental targets. Although it is not yet clear to what extent the Corona crisis will influence the climate agenda, European policymakers seem to be sticking to their thrust and timetable.

In Switzerland, legislators are monitoring developments in the EU, but are not (yet) planning any binding regulation in the financial sector. "Currently, we see a lot of sustainability initiatives in the market among financial institutions, which is basically positive. However, these plans are either oriented towards self-regulation, regulation in individual areas or lean towards EU regulation, which leads to a 'patchwork' of different implementation variants," explains Philipp Rickert, Head of Financial Services at KPMG. "Given the global nature of financial markets and the strong interconnectedness between the Swiss and European financial industries, we expect that EU regulation, at least in its broad outlines, will eventually become the market standard in Switzerland as well." This is not least because the upcoming EU regulation will have an extraterritorial effect in various areas: Financial firms in Switzerland that, for example, provide services to clients in the EU or manage European investment funds may fall within the scope of EU regulation and must also apply it, at least in part.

Uniform standard still missing

For regulatory efforts to be effective, data and reporting have a special role to play. In this context, transparency is essential for the functioning of sustainable finance. Complete and reliable sustainability information is needed so that financing decisions can be made accordingly. The focus here is on information based on the so-called ESG criteria (Environment, Social, Governance). However, the insufficient availability, reliability and completeness of this information is a fundamental problem that cannot be solved in the short term.

Many financial institutions and pension funds are working on disclosing more sustainability-related information. However, there is a lack of binding standards or there are too many different "standards". On the one hand, this leads to the fact that in certain areas reliable data is not yet available, which is necessary for making sustainable investment decisions. On the other hand, the lack of standards is also a reason why companies do not always disclose all relevant information that would be of importance for the beneficiaries or investors. Due to the sensitivity of the younger generations in particular to sustainability aspects, the pressure on institutions to disclose ESG criteria transparently to the outside world is likely to increase further.

In addition, interest in the social and governance factors that have received less attention to date has increased, not least as a result of the Corona crisis. The current crisis has revealed the fragility of the value chains of many industries. It has shown that companies that have placed great emphasis on the health and safety of employees, customers and business partners, and that have clear and efficient decision-making processes, have been able to respond more quickly to the Corona protection measures and adapt their business models.

Pascal Sprenger, a partner at KPMG and a specialist in regulatory issues in the financial sector, expects that the disclosure of sustainability information will be the market standard in the not too distant future and that this information will be audited by independent third parties - as has long been established in other sectors.

Digitization alone is not enough

As the integration of sustainability information into corporate activities is very data-intensive, digitization is likely to give Sustainable Finance a further boost. Not least because younger generations of customers expect transparency without having to wade through reams of data. Says Sprenger: "Financial institutions would do well to model their reporting to their customers more on the user interfaces of modern Internet platforms than on traditional forms of reporting."

However, regulation and technology will not be enough for a company's success in sustainability. In particular, corporate culture is an indispensable basis for any company's credible sustainability program. The KPMG study therefore also shows that financial institutions have a lot of catching up to do, especially in the areas of defining corporate purpose and individual accountability. Particularly in the absence of binding standards and uniform terminology, consistency between a financial institution's corporate culture, strategy and sustainability concept is essential for its credibility.

Greenwashing as a reputational risk

"We observe that most financial institutions are taking a phased approach to implementing their sustainable finance programs. For example, due to high customer demand, 'sustainable investing' is typically an area to which institutions attach great importance early on. However, this approach can lead to inconsistencies within the bank and be perceived by the public as corporate greenwashing. The associated reputational risks should not be underestimated in the age of social media," explains Sprenger. He advocates viewing sustainability not as a regulatory problem, but as an integral part of corporate strategy.

Read more about the current KPMG study "Clarity On Sustainable Finance" at here