Seizing long-term opportunities. Three myths about sustainable investments debunked.
The issue of sustainability is omnipresent – not least of all on financial markets. Sustainable investments have long become established, and companies that align themselves with ESG standards show above-average performance in many cases. That means it is high time to expose several myths.
Some persistent myths surrounding sustainable investments
The demand for sustainable investments has grown substantially in recent years. In 2020 alone, financial investments in Switzerland were up by approximately 30 per cent. However, many investors have remained cautious, due in no small part to some unanswered questions about sustainable investments. Yet, the more time that goes by, the more sustainability society and customers expect from companies. So, the time is ripe to shed some light on some of those questions and get to the bottom of three prevailing myths.
Myth 1: Traditional investments earn better returns than sustainable investments
In light of the crises of the past few decades, pressure is mounting on companies to give consideration to other interests besides profits: those of their employees, the society where the companies operate, and the environment. The latter has been given special momentum since the members of the United Nations adopted a plan in 2015 for achieving the 17 Sustainable Development Goals. Nonetheless, the myth that sustainable investments generate lower returns persists.
A number of studies show that business that align their practices to environment, social, and governance (ESG) standards can not only keep pace with traditional companies over the long term but in some areas may even outperform them. Such areas include revenue growth, equity, and return on invested capital (ROIC).
It is true that improving environmental protection generally involves higher costs. However, consistently avoiding risks – including everything from lawsuits to damage to the company's public image – can enhance a company's value, leading to lower long-term cost of capital and improved operating performance. That enabled companies with a greater ESG focus to perform well in difficult market environments – the first quarter of 2020, for instance, compared to traditional investments.
The three factors for sustainable investments based on ESG standards
Source: Credit Suisse
Myth 2: Sustainable investing is a niche market that is not suitable for every investor
For many CEOs, sustainability is a factor that could help their companies stand out and become more competitive. It is not only the executives who feel that sustainability is a positive factor for the future: Investors are also turning more often to sustainable funds. In Switzerland, the market for ESG investments generated double-digit growth again in 2020. There are two primary factors behind this trend: first, the more frequent use of sustainable investment approaches, and second, the positive market performance in 2020, which accounted for some one-third of growth.
Today, 52 per cent of the total Swiss fund market is invested in sustainable funds, for a volume of 694.5 billion Swiss francs. Just one year before, sustainable funds accounted for 38 per cent of the total volume. The shift in trend underscores the increased distribution and acceptance of sustainable investments.
Development of sustainable investments in Switzerland since 2010 (in billions of CHF)
Source: Swiss Sustainable Finance (SSF): Swiss Sustainable Investment Market Study 2020, Credit Suisse
Myth 3: Sustainability is not an objective quality criterion
More and more companies claim to be sustainable for image purposes, and sometimes it ends there. The practice of "greenwashing" prevents consumers from easily verifying whether a product is truly sustainable. At the same time, companies use marketing and PR measures to present a "green" image but fail to put their money where their mouth is. Descriptions such as "natural," "ecological," and "green" are used regardless of whether the company is certified in this regard. Certified labels that are reviewed on a regular basis have responded to this trend. Even in the financial services sector. To this end, the European Parliament and the Council of Europe have adopted a Sustainable Finance Disclosure Regulation.
This states that "Financial market participants shall publish on their websites information about their policies on the integration of sustainability risks in their investment decision making process." They are also required to publish a statement on their due diligence policies regarding the principal adverse impacts of investment decisions on sustainability factors and place it on their website.
